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 StatementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more 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 activitiesOperating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production.read more (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 AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more 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 EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.read more – 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 sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more as of 31st December.
Financial Analysis Gross margin, Operating Margin, Net Margin, Operating Leverage, Financial Leverage, ROEROEReturn on Equity (ROE) represents financial performance of a company. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit.read more (uses Equity from Balance Sheet) Current RatioCurrent RatioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it' short-term loans within a year. Current ratio = current assets/current liabilities read more, Quick Ratio, Cash Coverage RatioCash Coverage RatioCash Ratio is calculated by dividing the total cash and the cash equivalents of the company by total current liabilities. It indicates how quickly a business can pay off its short term liabilities using the non-current assets.read more, Receivables Turnover Ratio, Inventory Turnover RatioInventory Turnover RatioInventory Turnover Ratio is a measure to determine the efficiency of a Company concerning its overall inventory management. To calculate the ratio, divide the cost of goods sold by the gross inventory. read more, Payables Turnover Ratio, DSCRDSCRDebt service coverage (DSCR) is the ratio of net operating income to total debt service that determines whether a company's net income is sufficient to cover its debt obligations. It is used to calculate the loanable amount to a corporation during commercial real estate lending.read more 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

Let’s have a glance at the pictorial representation of income statement formatIncome Statement FormatThe standard format for preparing a company's income statement starts with the sales revenue figure of the business and then adds other income to it. After deducting all business expenses from the total amount of revenue and other income generated, the net profit/loss of the business organization is determined.read more

Balance Sheet vs Income Statement - Income Statement Format

Note: The numbers of outstanding sharesNumbers Of Outstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more 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

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.

Vertical Analysis of Colgate Income Statement

Interpretation of Colgate’s Income Statement

Interpretation of Colgate’s Balance Sheet

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

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

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