What Is the Difference Between Income Statement, Balance Sheet, and Cash Flow?
by Jordan DiPietro | Published on May 18, 2022
All publicly-traded companies are required to release three main financial statements -- the income statement, balance sheet, and cash flow statement. Here's an overview of what you can find on each one.
As the name implies, this is where you can find details about a company's income. Starting with the company's net sales (revenue), various costs are subtracted to arrive at four different income metrics.
- Gross income: Equal to sales minus the cost of goods sold and depreciation. Gross income can tell you how efficiently a company is producing its product.
- Operating income: Gross income with fixed expenses subtracted, such as rent, administrative expenses, and research & development.
- Pre-tax income: Accounts for expenses such as interest income and interest paid on debt, as well as charges and credits that have nothing to do with the company's core business operations.
- Net income: Net income is equal to pre-tax income, minus all income taxes (current and deferred) that a company pays on its earnings. This is generally the best indicator of a company's overall profitability during a certain time period.
From this information, there are a few things you can determine. For starters, you can determine the company's profit margins by dividing any of the income metrics by the revenue, which can be a great way to assess how efficiently a company is running and to compare it to peers.
Also, the income statement contains the calculation for a company's earnings per share. This is done by dividing the company's net income by the total number of shares, which is listed on the bottom of the income statement.
The balance sheet can tell you where a company stands financially, and is separated into three main sections -- assets, liabilities, and equity. A company's assets must be equal to (or "balance" out) its liabilities plus equity.
Assets are generally listed in order of liquidity, or the ease in which they can be sold or otherwise disposed. Assets are divided into two subcategories: current and long-term.
Current assets include those items that can be converted to cash within one year or less. Just to mention a few examples, current assets include such things as:
- Cash and equivalents
- Securities that have a liquid market
- Accounts receivable
- Prepaid expenses
Long-term assets include everything else, and cannot be readily liquidated. Some examples of long-term assets you may find on a company's balance sheet include:
- Securities without a liquid market
- Intellectual property
- Other intangible assets
Liabilities are organized in a similar manner, with current (within one year) liabilities such as rent, tax, utilities, interest payable, and any long-term debts due within the next year. Long-term liabilities generally include the company's long-term debt and any other liabilities that aren't due in the near future, such as pension fund liability.
Finally, the shareholders' equity portion of the balance sheet shows how much of the company's value is attributable to shareholders, and is sometimes referred to as "net equity." This includes any retained earnings, shares held in the company's treasury, and preferred shares, in addition to equity held by common shareholders.
Cash flow statement
A cash flow statement tells you about the overall flow of money into and out of a company. The statement is divided into three sections -- operations, investing, and financing.
First, the operations section shows the cash flow from the company's core business operations. Unlike the figures on the income statement, the cash flow statement ignores non-cash "income" such as depreciation.
Second, the investing section contains a company's expenses related to purchasing new equipment or buildings, as well as buying securities and other types of investments that involve cash leaving the company's accounts.
Third, the financing section shows changes in a company's debt, loans, or dividends. For example, when a company receives cash as a result from issuing debt, this adds to the cash coming in. Later, when the company makes payments to debtholders, cash is reduced.
The overall cash flow of a company can tell you whether the company is cash-flow positive or negative. Keep in mind that a negative cash flow isn't automatically a bad thing. For example, if a company invests a lot of money to expand its factories, that can be a positive long-term development. However, several consecutive time periods of negative cash flow are good cause for further investigation.
Combine the three for the full picture of a company's financials
By using all three of a company's financial statement, you can get a clear picture of how well a company is performing and derive useful metrics to use when analyzing a stock.
For example, by taking the net income figure from the income statement and the shareholders' equity from the balance sheet, you can determine the company's return on equity, which is one of the best metrics to assess its profitability.
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