Income Statement vs Balance Sheet

Income Statement and Balance Sheet Differences

Income statement is one of the financial statements of the company which provides the summary of all the revenues and the expenses over the time period in order to ascertain the profit or loss of the company, whereas, balance sheet is one of the financial statements of the company which presents the shareholders’ equity, liabilities and the assets of the company at a particular point of time.

Income Statement provides how the company’s business performance has been during the given period, whereas the balance sheet is a snapshot of the company’s assets and liabilities at a given point in time.

Balance Sheet vs Income Statement

Comparative Table

Items Income Statement Balance Sheet
What is it? The Income Statement shows how the business has performed for the period of time under consideration. Balance Sheet provides us an overall picture of the company’s financials. It provides details on sources of Funds and Uses of Funds.
Key Items? Revenue – Revenue results from an entity’s operating activities (selling merchandise, selling services)
Costs and Expenses – These are incurred in generating revenues and operating the entity.
Profit – The net balance is the Profit that the business makes.
Assets –  Assets are the firm’s economic resources. They are the current and future economic benefits obtained or controlled by an entity as a result of past transactions or events. Assets are further divided into two types – Current Assets and Long Term Assets.
Liabilities –  Liabilities are obligations owned to others as of the balance sheet date. They arise from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Shareholder’s Equity – The third section of a balance sheet is Stockholders’ Equity. (If the company is a sole proprietorship, it is referred to as Owner’s Equity.) The amount of Stockholders’ Equity is exactly the difference between the asset amounts and the liability amounts.
Time Period Income Statement is prepared for a period of time. For example, Colgate, in its 10K Filings, reports income statements for the period between 1st January to 31st December. Balance Sheet, on the other hand, is at a specific point in time. Colgate reports its balance sheet as of 31st December.
Financial Analysis Gross margin, Operating Margin, Net Margin, Operating Leverage, Financial Leverage, ROE (uses Equity from Balance Sheet) Current Ratio, Quick Ratio, Cash Coverage Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Payables Turnover Ratio, DSCR Ratio, Return on Total Assets
Uses Income Statement helps the Management by providing them with an overall view of the business. Revenue vs. Costs, how profitable the business is and areas that they should focus on Balance Sheet provides the management with the overall financial health of the company – the amount of debt taken, the total liquidity position of the company, cash, and cash balance, etc

Income Statement vs. Balance Sheet Format

We will explain how the items are being arranged in both income statements and balance sheets, and then we will look at a pictorial representation of them.

Format of Income Statement

  • First, we will start with “total sales/ revenue.” Total revenue can be calculated by multiplying the total units produced with the price per unit. This is called “gross revenue.” From gross revenue, sales returns/sales discount is being deducted, which gives us “net revenue.”
  • After that, we will include “cost of sales” which are the cost directly related to sales. After deducting the “cost of sales” from the “net revenue,” we will get “gross profit/ loss.”
  • From “gross profit/ loss,” operating expenses (selling & administrative expenses, salaries of personnel, research & development expenses, etc.) would be deducted. Operating expenses are expenses that are not directly related to sales. Then, we will also deduct the depreciation from the gross profit/ loss. Deducting operating expenses and depreciation expenses from gross profit/ loss would give us operating profit or EBIT (Earnings/ Loss before interest and taxes).
  • Now there are two things that need to be done. First, the interest expenses need to be deducted from the EBIT, and second, the interest income earned from the “savings account” of the company would be added back. And we will get PBT (Profit/ Loss before taxes).
  • Finally, we will deduct the taxes to reach the bottom line. It can be either “net profit” or “net loss,” which is also called “profit/ loss after tax.”
  • After that, we need to calculate the EPS. For example, if we need to calculate the EPS of Company MNC and we know that the “net profit” is $500,000 and the number of “outstanding shares” is 50,000, the EPS would be = ($500,000/50,000) = $10 per share.

Let’s have a glance at the pictorial representation of income statement format

Balance Sheet vs Income Statement - Income Statement Format

Note: The numbers of outstanding shares for the year-end 2015 & 2016 are 90,000 and 100,000, respectively.

Format of Balance Sheet

Let’s have a glance at the format of the balance sheet.

  • First, we will write the assets as per the liquidity. That means we will first put down the “current assets.” Current Assets include – Cash & Cash Equivalents, Short-term investments, Inventories, Trade & Other Receivables, Prepayments & Accrued Income, Derivative Assets, Current Income Tax Assets, Assets Held for Sale, etc.

Balance Sheet vs Income Statement - balance Sheet Format 1

  • After current assets, we will write down “non-current assets,” which can’t be converted into cash within a year. Non-current assets include – Property, plant and equipment, Goodwill, Intangible assets, Investments in associates & joint ventures, Financial assets, Employee benefits assets, Deferred tax assets, etc.
  • The total of current assets and non-current assets will be called “total assets.”
  • After total assets, we will include “current liabilities.” Under current liabilities, we will include – Financial Debt (Short term), Trade and other payables, Accruals and deferred income, Provisions, Derivative liabilities, Current Income Tax Liabilities, Liabilities directly associated with assets held for sale, accounts payable, sales taxes payable, income taxes payable, interest payable, bank overdrafts, payroll taxes payable, customer deposits in advance, accrued expenses, short-term loans, current maturities of long-term debt, etc.

BS - Liabilities

  • After current liabilities, we will include “non-current liabilities.” Non-current liabilities include – Financial Debt (Long term), Employee Benefits Liabilities, Provisions, Deferred Tax Liabilities, Other Payables, etc.
  • The total of current liabilities and non-current liabilities will be called “total liabilities.”
  • Finally, we will include the last – “shareholders’ equity.” Here’s how we will format shareholders’ equity –

BS Shareholders Equity

Colgate Example to Differentiate

For interpreting the Income Statement and Balance Sheet, we make use of Vertical Analysis or Common Size Statement.

  • For each year, Income Statement line items are divided by its respective year’s Top Line (Net Sales) number.
  • For example, for Gross Profit, it is Gross Profit / Net Sales. Likewise for other numbers

Vertical Analysis of Colgate Income Statement

Interpretation of Colgate’s Income Statement

  • In Colgate, we note that the profit margin (Gross Profit / Net Sales) has been in the range of 56%-59%.
  • We also note that SG&A has decreased from 36.1% in 2007 to 34.1% in the year ending 2015.
  • We note that Net profit Margin has been in the range of 12% to 14.5%. However, it decreased in 2015 to 8.6%
  • Also, note that the operating income dropped significantly in 2015.
  • Also, effective tax rates jumped to 44% in 2015 (from 2008 until 2014, it was in the range of 32-33%).

Interpretation of Colgate’s Balance Sheet

  • For each year, Balance Sheet line items are divided by its respective year’s Top Assets (or Total Liabilities) number.
  • For example, for Accounts Receivables, we calculate as Receivables / Total Assets. Likewise for other balance sheet items

Colgate BS

  • Cash and Cash equivalents have increased from 4.2% in 2007 and are currently standing at 8.1% of the total assets.
  • Receivables had decreased from 16.6% in 2007 to 11.9% in 2015. 
  • Inventories have decreased too, from 11.6% to 9.9% overall.
  • What is included in “other current assets”? It shows a steady increase from 3.3% to 6.7% of the total assets over the last 9 years.

Colgate BS liabilities

  • On the liabilities side, there can be many observations we can highlight. Accounts payable decreased continuously over the past 9 years and currently stands at 9.3% of the total assets.
  • There has been a significant jump in the Long-Term Debt to 52,4% in 2015.
  • Non-controlling interests have also increased over the period of 9 years and are now at 2.1%

Conclusion

Balance sheet vs. Income Statement, they go hand in hand. And if we only look at the income statement, we would miss out on the holistic picture of the financial matters of the company. If we only concentrate on the balance sheet, we will not have a clue about the bottom line.

So, you need to know how to look at both at the same time. As an investor, these two statements will help you calculate most of the ratios. These ratios will help you ascertain a clear picture of the company, and then you can decide whether you should invest in the company or not.

Income Statement vs. Balance Sheet Video

Related Articles

This has been a guide to Income Statement vs. Balance Sheet with a step by step comparison. Here we also took practical examples of Colgate to highlight the differences between the financial Statement. You may also have a look at the following articles –