Do you know what the Balance Sheet, Cash Flow Statement and Income Statement are?

 

This article is to help you develop a general understanding of terms like Balance Sheet, Cash Flow Statement, and Income Statement. We will talk about what they are and the basic difference between them. 

 

For a start, a Balance Sheet mentions what the company owns and what are the liabilities. At the same time, a Cash Flow Statement talks about the cash flow records for a fixed time. 

 

• Balance Sheet –

 

It shows assets, liabilities, and equity owned by stakeholders for a given period like quarterly, half-yearly, or annually. It shows the company's assets and how they were bought via debt or issuing equity shares. The balance sheet also tells about the shareholders' exact amount invested in equity. It shows the impact of the Cash Flow Statement on assets and liabilities. 

 

 Structure: All the assets are listed on one side of the page, and all the liabilities on the other. If the cash is used to pay a loan listed on the liabilities side, this cash amount is reduced from the asset side, and the loan amount is reduced from the liabilities side. A Balance Sheet means that assets and liabilities should equate to each other. 

 

Formula for Calculation – 

                                    Asset = Liabilities + Owner’s Equity

 

Examples of Asset and Liabilities- 

  

  

ASSETS	LIABILITIES
Cash/Gold	Long term debt
Marketable Securities	Wages due
Accounts Receivables	Taxes and Rent
Inventory	Dividend Payable

 

  

 

• Cash Flow Statement-

 

This Statement shows the entry and exit of cash from the company. It shows the circular flow of cash. The Cash Flow Statement shows the ability of the company to generate cash to pay its obligations and fuel daily operating expenses. 

 

Method for Calculation: It is derived from Income Statement by subtracting or adding cash flow from the Net Income. This subtraction and addition depend upon 3 factors given below –

 

1. Operating Activity – This Statement tells about the amount of cash generated by the sale of the company's products and services. This Statement also shows the outflow in wages, interest payments, taxes, and payments to suppliers. 

 

1. Investing Activity – This shows the outgoing or incoming cash from long-term investments in the company. Things like loans made to vendors, sale or purchase of an asset, Mergers and Acquisition payments, etc., are included. 

 

1. Financial Activity – It includes cash flow from banks, payment of dividends, payment of debt principal, and repurchase of equity shares. 

 

• Income Statement–

 

This Statement tells about the revenue and expenses of a company for a given period. The Income Statement is also called the Profit and Loss Statement. It focuses on 4 terms – Revenue, Expenses, Losses, and Gains about a fixed period. However, it does not differentiate between sales bringing in cash and sales on credit. The Income Statement shows how net revenue turns into net earnings (Profit and Loss). 

 

The formula for Calculation –

 

Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)

 

I hope you got a clear picture of the basics of a Financial Statement. To understand practically, you can watch/read GCC News. It tells a lot about the economy of Gulf countries.