fbpx

Comparing the Financial Statements: Income Statement vs Balance Sheet

Comparing the Financial Statements: Income Statement vs Balance Sheet

Table of Contents

Income Statement Vs Balance Sheet is crucial tools for managing a company’s Financial Planning. A balance sheet lists a company’s current assets, liabilities, equity, and other financial investments. Contrarily, an income sheet provides a concise summary of a company’s financial activities during a certain time period, including profits and losses.

Both are used in tandem to keep track of a company’s finances and decide on prudent investments and investments, but there are some important distinctions. Innovature BPO can help you’ll find out more about these financial statements and learn how to use them in reading this guide.

What Is Income Statement Vs Balance Sheet?

For banks and investors, both income statements and balance sheets are essential because they provide a clear picture of a company’s financial situation. But, the Income Statement Vs Balance Sheet has a number of variances.

In spite of that these two documents offer distinct sets of information, but they are frequently misinterpreted and mixed up. So, to use the given data efficiently, business leaders must understand the distinction between an Income Statement And Balance Sheet.

What is a balance sheet?

Comparing the Financial Statements: Income Statement vs Balance Sheet

The foundation of a company’s financial statements is its balance sheet, which offers a picture of its financial situation at a specific time.

Owner’s equity, which includes the money initially invested in the business, as well as any retained earnings attributable to the owners or shareholders, are included in this. It also includes what the company owns (its assets), what it owes (its liabilities), and what it owns.

Based on the following equation, two columns have been created for this statement:

Liabilities + Shareholder’s equity = Assets

With assets in one column, liabilities in the other, and owner equity in the first, this equation serves as the basis for a balance sheet.

The balance sheet summarizes all transactions, funds raised, total debts incurred, assets purchased, and their current values in order to provide a comprehensive picture of the company’s success since its formation.

Using financial ratios like debt-to-equity, which reflects the company’s ability to pay its debts using equity, or the current ratio, which divides current assets by current liabilities to determine the company’s ability to meet its obligations over the next 12 months, this gives insight into the operations, finances, and future prospects of the company.

What’s included in a balance sheet?

Assets, liabilities, and owner’s equity are included in the balance sheet at the end of the accounting period.

1/ Assets

Cash and cash equivalents: Included under current assets, this amount reflects the value of cash and other cash equivalents held by the business at the end of an accounting period, including marketable securities and short-term deposits.

Accounts receivable: This is money owing to a business for delivered but unpaid goods and services. It is categorized as a current asset on the balance sheet and can be used as collateral for loans.

Inventory: Includes finished commodities ready for sale as well as raw materials meant for the manufacturing of goods or services. Inventory is included as a current asset as well.

Plant, property, intellectual property, and more: These are long-term assets that cannot be easily converted into cash, are not directly used in the manufacturing process, and have a life of more than a year. Among this category of property are goodwill, copyright, and trademarks. Depending on their worth or usage, they are depreciated or amortized. They are classified as non-current assets on the balance sheet.

2/ Liabilities

Debt: Any money due to lenders, banks, or suppliers is considered a debt. Depending on whether they are long-term or short-term debts, they can be categorized as either current liabilities or non-current liabilities. Even with long-term debts, the current portion of long-term debt includes upcoming repayments.

Accounts payable: The company’s unpaid invoices to suppliers or vendors for goods and services received go under this category. These obligations are categorized as current liabilities since they are typically due and payable within 90 days due to their short duration.

Underfunded pension plan: Plans sponsored by companies that have greater liabilities than assets are said to be underfunded and unable to pay current or future commitments. They are frequently categorized as non-current liabilities, and the business is required to make payments and fill in the gaps as required.

Deferred tax liability: This is the balance of accumulated but unpaid taxes. In the case of installment sales or to account for the accrual/cash timing discrepancy, deferred tax liability frequently results from the time lag between when the tax is owed and when payment is due.

3/ Owner’s or shareholder’s equity

The total assets attributable to owners or shareholders in the event of a company’s dissolution, after all, debts or liabilities have been settled, is what is referred to as owner’s or shareholder’s equity.

The return on equity (ROE), which is determined by dividing net income by shareholders’ equity, is included in this section of the balance sheet. The return on equity ratio gauges how well management uses and promotes profits based on equity.

Retained earnings, or the percentage of net income not released to shareholders as dividends are included in shareholder equity as well. Retained profits are utilized to finance the company’s ongoing development and growth.

When it is unable to create sufficient returns with these retained earnings, management will normally try to maximize return on equity and return money to shareholders in the form of dividends or share repurchases.

Example of Balance Sheet

The balance sheet for Apple Inc. (AAPL) as of the end of its fiscal year 2017 is shown below.

Comparing the Financial Statements: Income Statement vs Balance Sheet

Current Assets

Current assets, which are short-term assets often used up in one year or less, are included in the top part.

  • There were $128.6 billion in total current assets (highlighted in blue).
  • Cash totaled about $20.3 billion.
  • Short-term investments known as marketable securities came close to $54 billion.
  • The amount owed to Apple for the sale of its goods and services, or accounts receivable, was $17.8 billion. Depending on the agreed-upon terms, a receivable may be due in 30, 60, or 90 days. Investors prefer to see increased receivables over time since it denotes increasing sales. But aged receivables are something we want to avoid.
  • The $4.8 billion in inventories could be finished goods that are awaiting sale or shipment, or raw materials or supplies that are used to make products.

Long-term Assets

Long-term assets are included next on the balance sheet. This asset part is completed by other assets and intangible assets, such as trademarks and intellectual property.

Long-term assets, often known as fixed or capital assets, are those that a corporation can anticipate using, replacing, or turning into cash after the typical operational cycle of at least 12 months. They are frequently in use for years. This sets them apart from existing assets, which businesses normally use up within a year. They are frequently referred to as illiquid assets since they are more difficult than current assets to convert to cash.

  • At the end of Apple’s 2017 fiscal year, the company’s total assets were $375.3 billion.
  • Investments over the long period came to $194.7 billion.
  • Property, plant, and equipment (PPE) are classified as fixed assets since they produce income over the long term and are not consumed within a year. PPE was $33.7 billion for Apple.
  • At the end of Apple’s 2017 fiscal year, the company’s total assets were $375.3 billion.

Current Liabilities

Current liabilities are short-term debts with one-year maturities.

  • Current liabilities were $100.8 billion (highlighted in purple).
  • Apple owes $49 billion in accounts payable to its suppliers, which is a short-term debt.
  • Accrued expenses are costs that have not yet been paid but are likely to be reimbursed. Apple reported accumulated expenses of $25.7 billion.

Long-term Liabilities

Although not all of Apple’s long-term obligations are disclosed, they typically consist of:

  • Debt for Apple, including bank debt and long-term debt, came to $97 billion.
  • Rent, taxes, and utility payments are due.
  • Wages payable.
  • Dividends are payable.

Shareholders’ equity

Retained earnings are the funds that aren’t distributed as dividends but are kept on hand to be put back into the company or used to pay down debt.

Apple reported retained earnings of $98.3 billion.

An important factor in determining a company’s financial health is its shareholders’ equity, which is calculated as the total assets less the total liabilities. The net value or net worth of a firm is represented by shareholders’ equity, which for Apple was $134 billion. In the event that the company was to liquidate, this would be the money that would be left over for the shareholders.

What is an income statement?

Comparing the Financial Statements: Income Statement vs Balance Sheet

The income statement, also called the profit and loss (P&L) statement, summarizes the financial performance of a company over a given time period by disclosing sales, costs of goods sold, expenses, and net profit attributable to shareholders.

It is one of the three important financial statements a company provides, whether quarterly, annually, or both if it’s a public corporation, is the P&L statement. It keeps track of revenue streams, costs, and budgets, enabling the business to respond to deviations from expectations. The P&L statement is important to lenders and investors because it allows them to compare different time periods to evaluate the company’s long-term trajectory.

An experienced analyst can use ratios to gain profound insights from the information in a profit and loss statement. These include the price-earning and return-of-equity ratios to evaluate the effectiveness of capital allocation, the times-interest-earned (TIE) ratio to assess the margin of safety a company has to meet its debt payments, and the gross and operating margin ratio, which highlights the company’s profitability in relation to the sales and expenses incurred.

An income statement contains what?

The four main components of the income statement are sales revenues, expenses, profits, and losses. It doesn’t worry about sales in cash or other payment methods, or anything else related to cash flow.

Example of Income Statement

Comparing the Financial Statements: Income Statement vs Balance Sheet

The income statement for J.C. Penny (JCP)’s fiscal year that ended on February 3, 2018, is shown below. The total revenue or sales for the time period are shown in the top area.

  • The amount of net sales, or revenue, was $12.5 billion. As a result of its placement at the top of the income statement, sales, and revenue are frequently referred to as the top line.
  • $8.17 billion was spent on the costs of goods sold (COGS). These expenses reflect what it cost to produce products and services across the relevant time periods. COGS are just the costs related to the production process and are considered direct costs.
  • The additional costs not directly related to production include selling, general, and administrative costs (SG&A). The SG&A for J.C. Penney was $3.4 billion.
  • The total amount spent or paid was $12.39 billion.
  • After deducting total expenses from total revenue, operating income was $116 million.
  • J.C. Penney’s net interest expense for the year was $325 million, representing the cost of debt servicing.
  • The year’s net income was a $116 million loss. Because it is the last figure and is found at the bottom of the income statement, net income is also known as net profit or the bottom line.

What distinguishes an Income Statement Vs Balance Sheet?

Most organizations use the two tools Income Statement And Balance Sheet to gain a complete picture of the organization’s finances, despite the fact that they have different purposes and focus on different aspects.

For instance, you normally need to present financial documents like an Income Statement Vs Balance Sheet when you apply for a company loan. In order to decide on future investments, investors may also review these documents.

Time

The Balance Sheet provides a concise overview of a company’s financial situation at a particular period. The Income Statement provides an overview of the company’s financial performance for a specific time period.

Key items

In order to offer correct information, the Balance Sheet is further classified to include assets, liabilities, and shareholder’s equity. Meanwhile, the Income Statement consists of receipts, outlays, and profits and losses from the sale or disposal of assets.

Focus

The emphasis of Balance Sheet is on the assets, liabilities, and investments of the company. The Income Statement has a duty to highlight the company’s revenue and expenses.

Financial analysis

Utilizing statistics like the current ratio, debt-to-equity ratio, and return on shareholder equity, the Balance Sheet assists in evaluating financial health. Financial performance can be Income Statement depicted using ratios like gross margins, operating margins, price-to-earnings, and interest coverage.

Purpose

In order to assess a company’s present financial status, Balance Sheet is utilized. It provides answers to issues like whether the business has adequate assets to cover its responsibilities.

Meanwhile, The Income Statement is used to monitor the company’s ongoing finances and examine gains, losses, and other results of previous investment choices.

Usage

The Balance Sheet is used by lenders and investors to assess collateral availability and creditworthiness. The Income Statement is used by management, shareholders, investors, and others to evaluate a company’s performance and prospects going forward.

Creditworthiness

Another significant distinction between the Income Statement Vs Balance Sheet is how they affect creditworthiness. The Balance Sheets are used by lenders to assess resource usage and evaluate if additional credit should be provided. Lenders can determine whether a firm is profitable enough to meet its obligations by looking at its Income Statements.

Metrics

To determine a company’s liquidity, compare the items listed on the balance sheet. Sales are compared to an income statement’s subtotals to ascertain the –

  • Gross margin percentage.
  • Operating income percentage.
  • Net income percentage.

What features of an Income Statement Vs Balance Sheet are similar?

Important financial statements that describe a company’s financial accounting include Income Statement And Balance Sheets. Despite their differences, they do have some of the following things in common.

  • Both records aid in assessing an organization’s performance.
  • Both records show a company’s financial situation at a certain time.
  • The same accounting rules were used in the preparation of both the Income Statement Vs Balance Sheet.
  • Both the Income Statement Vs Balance Sheet include crucial financial data that helps creditors, investors, and other stakeholders make wise decisions.
  • For a company’s financial reporting, both documents are essential.
  • Both documents are released on a regular basis, typically every quarter or once a year.
  • A company’s profitability and financial stability are determined by both documents.

Assessing and Improving Your Business Using Both Income Statement Vs Balance Sheet

Combining Income Statement And Balance Sheet can provide you a lot of information about how your organization is doing financially and operationally. Here are some important things to watch out for so you can evaluate and get better.

Losses and Liabilities

Focus on the largest liabilities when examining your balance sheet and the largest losses when examining your income statement. What consumes the most cash? What are some strategies for limiting losses or liabilities?

Profits and Assets

Pay close attention to your income statement’s profits and your balance sheet’s most valued assets. Change your strategy from what you did in the earlier step. Analyze your current source of income. What are some strategies for leveraging your assets to increase your profits?

Red Flags

Early detection of warning signs in your financial records can reduce losses and enable a turn toward profit before it is too late. Here are some typical warning signs to watch out for:

  • Rising ratio of liabilities to assets
  • Ongoing losses
  • Recurring accounting mistakes (mistakes, etc.)

Answers to FAQs

What is the purpose of a balance sheet?

A balance sheet is a financial statement that tracks assets, liabilities, stocks, and other investments. It can assist in determining a company’s value, understanding the asset-to-liability ratio, and estimating current liquidity.

What does an income statement serve?

An income statement is used to document profits and losses in company operations in order to record revenue and expenses over a specific time period. Income statements are used to determine if a business is profitable or in need of financial assistance when making loan and investment decisions.

Which is more crucial: the income statement or the balance sheet?

For any organization, the Income Statement Vs Balance Sheet serves diverse objectives and is more or less equally significant, depending on what each is employed for. For example, investors may examine equities on a balance sheet and request an income statement to track earnings and losses over a given time period.

For investors and analysts, the Income Statement And Balance Sheet are very important. Because, both the Income Statement Vs Balance Sheet together provide a fuller picture of a company’s current health and future prospects.

See more»

 

Are you ready to take your business
to the next level?

Trust us to find the best-fit candidates while you concentrate on building a skilled and diverse remote team.