Difference Between Balance Sheet and Cash Flow Statement

Introduction

To conduct a thorough evaluation of a company's financials, one must understand how to examine each of the major financial statements and how they are interrelated. This comprises the cash flow statement and balance sheet, which investors, business executives, creditors, and others frequently use to assess the company's financial health.

In this article, let's outline the key differences between a cash flow statement and a balance sheet ensuring that one can understand what each may tell them about their company's finances. Inevitably, be able to understand how the two assertions are related and why one should want to evaluate both together to draw further knowledge.

Balance Sheet

The balance sheet is one of the most important financial statements used by businesses, investors, and analysts to evaluate a company's financial health. It presents a snapshot of the company's financial status at a certain point in time, typically at the conclusion of a reporting period, such as a quarter or a year.

The balance sheet follows the fundamental accounting equation, which specifies that a company's assets must equal its liabilities plus equity.

Assets

Assets are company-owned resources with economic worth that may be exploited to produce future advantages. They are divided into two categories: current and non-current assets. Current assets include cash and assets that are expected to be turned into cash or used within a year, such as accounts receivable and inventories. Non-current assets, or long-term assets, comprise property, plant, and equipment, as well as intangible assets such as patents and goodwill.

Liabilities

Liabilities are obligations that a firm owes to other parties. Like are classified as either current or non-current. Current liabilities are debts and commitments that mature within a year, such as accounts payable and short-term debt. Non-current liabilities, also known as long-term liabilities, are debts and obligations that are due after a year, such as long-term debt and deferred tax liabilities.

Equity

Equity indicates the ownership part of the firm. It is computed as the difference between total assets and liabilities. Equity comprises common stock, extra paid-in capital, retained earnings, and cumulative other comprehensive income. Equity is crucial since it displays how much of the company's assets are owned by the shareholders.

Accounting Equation

The balance sheet is based on the basic accounting equation, which stipulates that assets equal liabilities plus equity. This equation must always be balanced, which means that the entire value of assets must equal the total value of liabilities plus equity. To keep the equation balanced, each change on one side must be accompanied by an equivalent change on the other.

Purpose

The balance sheet serves several objectives. It provides crucial data about a company's liquidity, solvency, and financial leverage. Liquidity refers to the firm's capacity to fulfill its short-term commitments, solvency refers to its ability to meet its long-term obligations, and financial leverage refers to the amount to which the company uses debt financing.

Although the balance sheet is a useful tool for financial research, it does have drawbacks. For example, it does not represent the market worth of assets and liabilities because it is dependent on previous costs. Furthermore, it may need to properly reflect the company's financial risks and contingencies.

Cash Flow Statement

The cash flow statement is an important financial statement that details how cash flows into and out of a firm over a certain period.

It is organized into three major categories: operating, investing, and financing operations.

Operating Activities

This portion of the cash flow statement summarizes the cash flows from the company's key business operations. It contains income collected by clients, cash paid to suppliers and staff, interest paid, and taxes owed. Operating cash flow is a key measure of a company's capacity to earn cash via its core operations. A positive operational cash flow is often regarded as a sign of financial health, indicating that the firm can cover its day-to-day running expenditures.

Investing Activities

The cash flow statement's investing activities part highlights the cash flows from the company's long-term asset investments. This comprises cash spent on the acquisition of property, plant, and equipment, as well as income obtained from the sale of investments or fixed assets. Investing cash flow gives insight into the company's capital expenditures as well as its growth and expansion plan.

Financing Activities

The cash flow statement's financing activities section describes cash flows associated with the company's financing activities. This comprises funds obtained via stock issuance or borrowing, as well as dividend payments and debt repayment. Financing cash flow allows investors and analysts to examine how a company funds its operations and development, as well as its capacity to satisfy financial obligations.

Types of Cash Flows

• Operating Cash Flow (OCF): This is the cash earned or spent on the company's fundamental business operations. It is computed by deducting non-cash items from net income and factoring in working capital movements.
• Investing Cash Flow (ICF): This metric indicates the cash flows generated by the company's long-term investments. It comprises the acquisition and sale of property, plant, and equipment, as well as investments in securities.
• Financing Cash Flow (FCF): This metric depicts the cash flows from the company's financing activities. It includes funds obtained via the issuance of shares or borrowing, as well as cash spent for dividends and debt repayment.

Purpose

The cash flow statement serves multiple purposes. It gives information on a company's liquidity, including whether it has enough cash to satisfy its short-term obligations. It also enables investors and analysts to analyze a company's capacity to earn cash from its core businesses, which is critical for long-term viability. Furthermore, the cash flow statement supplements the information contained in the income statement and balance sheet, offering a more complete view of the company's financial performance.

While the cash flow statement contains useful information, it does have certain limitations. For example, it does not account for non-cash activities like depreciation, which might have an impact on a company's profitability. Furthermore, it does not include information regarding the timing of cash flows, which is critical for determining a company's liquidity.

Comparison Table

Conclusion

Balance sheet provides a snapshot of a company's financial position at a specific point in time, showing its assets, liabilities, and equity. On the other hand, the cash flow statement shows how cash is generated and used over a period, providing insights into a company's liquidity and cash flow management. Both statements are crucial for understanding different aspects of a company's financial health and are used together to assess its overall financial performance.