Financial statements are essential documents that detail how a company earns and spends its income. There are three basic types of financial statements, including income statements, balance sheets and cash flow statements. Along with statements of shareholders’ equity, each has a specific use and some key differences, giving a picture of a company’s financial health.
Using the correct type of statement for the appropriate situation ensures that the business maintains regulatory compliance while providing company leaders with the information necessary to make good decisions when determining the future of the company. They can be critical for small businesses and large corporations.
What Is an Income Statement?
The income statement is also sometimes referred to as the statement of income, profit and loss statement (P&L) or statement of operations. It illustrates the profitability of a company over a given period of time. This statement typically includes one section detailing revenues and gains and another section detailing expenses and losses, but the CFA Institute indicates that there can be multiple subcategories included in these sections:
- Total revenue
- Cost of sales
- General expenses
- Administrative expenses
- Other operating expenses (such as depreciation)
- Non-operating income and expenses
- Other gains and losses
Taken together, these components arrive at net income. The income statement will show a net profit if the company’s revenues and gains are greater than its expenses and losses, but it will show a net loss if the company experiences greater expenses and losses. Multi-step income statements also do intermediate calculations to show gross profit and operating income. The income statement shows whether the company turned a profit within a given period and gives insight as to its financial position.
What Is a Balance Sheet?
A company’s balance sheet provides an overview of a company’s financial situation at a specific point in time rather than profitability over a specific period of time. It includes the company’s total assets, retained earnings, long-term liabilities and the owners' or stockholders' equity. The company’s current assets must always equal its current liabilities plus owner equity. Therefore, a difference between the balance sheet vs. income statement is that the balance sheet helps you measure liquidity, according to the State of Indiana.
This document has three categories with components such as the following:
- Current assets
- Property and equipment
- Intangible assets
- Other assets
- Current liabilities
- Long-term liabilities
- Common stock
- Treasury stock
- Paid-in capital
- Retained earnings
- Accumulated other comprehensive income
Stockholders' equity is what's left over after subtracting liabilities from the company's assets and the value of treasury stock is subtracted from the total in this category. Subcategories exist within these components.
The balance sheet helps business owners and managers maintain a firm grasp on the business’s current financial situation in order to make appropriate financial decisions. For example, a lengthening receivables cycle may call for more aggressive collection practices.
What's a Cash Flow Statement?
The cash flow statement (CFS) records the amount of actual money that flows into and out of the company. Managers can use a cash flow statement to get a look at where the company is getting and spending its money and to better understand how well operations are going. The cash flow statement helps investors and potential investors determine whether a company can be trusted to spend their money wisely.
It includes three major sections, according to Harvard Business School Online: cash flow from investing, cash flow from operations and cash flow from financing activities.
Difference Between Balance Sheet and Income Statement and Cash Flow
Each type of financial statement provides financial decision-makers with different types of information necessary to run the company and gauge its financial performance.
- The income statement details the company’s revenues, gains, expenses and losses, but it doesn't show cash receipts or cash disbursements.
- The balance sheet often includes what might be referred to as theoretical money, such as that which is owed to the company but not yet collected.
- The cash flow statement reports cash actually received or paid.
The bottom line can be the picture created when they’re all put together.
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