Balance Sheet vs. Cash Flow Statement: What's the Difference? (2024)

Balance Sheet vs. Cash Flow Statement: An Overview

The balance sheet and cash flow statement are two of the three financial statements that companies issue to report their financial performance. The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. While the balance sheet shows what a company owns and owes, the cash flow statement records the cash activities for the period.

Key Takeaways

  • A balance sheet shows what a company owns in the form of assets and what it owes in the form of liabilities.
  • A balance sheet also shows the amount of money invested by shareholders listed under shareholders' equity.
  • The cash flow statementshows the cash inflows and outflows for a company during a period.
  • In other words, the balance sheet shows the assets and liabilities that result, in part, from the activities on the cash flow statement.

Balance Sheet

A balance sheetlists a company's assets, liabilities, and shareholders' equity at a point in time, typically at the end of a period, such as the end of a quarter or year. A balance sheet shows what a company owns in the form of assets, what it owes in the form of liabilities, and the amount of money invested by shareholders listed under shareholders' equity (also referred to as owners' equity).

The balance sheet shows a company's assets, but also shows how those assets were financed,whether it was through debt or through issuing equity. The balance sheet is broken down into three parts: assets, liabilities,and owners' equity, and it is represented by the following equation:

Assets=Liabilities+Owners’Equitywhere:Owners’Equity=TotalAssetsminustotalliabilities\begin{aligned} &\text{Assets} = \text{Liabilities} + \text{Owners' Equity} \\ &\textbf{where:} \\ &\text{Owners' Equity} = \text{Total Assets minus total liabilities} \\ \end{aligned}Assets=Liabilities+Owners’Equitywhere:Owners’Equity=TotalAssetsminustotalliabilities

To calculate the balance sheet, one would add total assets to the sum of total liabilities and shareholders' equity.

The balance sheet equation above must always be in balance. If cash is used to pay down a company's debt, for example, the debt liability account is reduced,and the cash asset account is reduced by the same amount, keeping the balance sheet even.The name "balance sheet" is derived from the way that the three major accounts eventually balance out and equal each other; allassetsare listed in one section, and their sum must equal the sum of allliabilitiesand theshareholders' equity.

Below are examples of items listed on the balance sheet:

Assets

  • Cash and cash equivalentsareliquid assets, which may include Treasury billsandcertificates of deposit.
  • Marketable securitiesareequity and debt securities.
  • Accounts receivablesarethe amount of money owed to the company by its customers for product and service sales.
  • Inventory is either finishedgoods or raw materials.

Liabilities

  • Debt includinglong-term debt
  • Rent, taxes, utilities payable
  • Wages payable
  • Dividendspayable

Shareholders' Equity

  • Shareholders' equity is a company's total assets minus itstotal liabilities.Shareholders' equity represents the net value or book value of a company. It isthe amount of money that would be returned to shareholders if all of theassets were liquidated, and all of the company'sdebt waspaid off.
  • Retained earningsare recorded under shareholders'equity and are the amount ofnet earningsthat were not paid to shareholdersasdividends. Instead, the money wasretained to be reinvested in thebusiness, or pay down debt.

The balance sheet shows a snapshot of the assets and liabilities for the period, but it does not show the company's activity during the period, such as revenue, expenses, nor the amount of cash spent. The cash activities are instead, recorded on the cash flow statement.

Cash Flow Statement

The cash flow statementshows the amount of cash and cash equivalents entering and leaving a company.

The cash flow statement (CFS) measures how well a company manages and generates cash to pay its debt obligations and fund operating expenses. The cash flow statement is derived from the income statementby taking net income and deducting or adding the cash from the company's activities shown below.

The three sections of the cash flow statement are:

  • Cash from operating activities
  • Cash from investing activities
  • Cash from financing activities

Operating Activities

Operating activities on the CFS include any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from the sale of a company's products or services.

Changes made in cash, accounts receivable,inventory, andaccounts payableare shown in cash from operating activities and might include:

  • Receipts from sales of goods and services
  • Interest payments
  • Income tax payments
  • Payments made to suppliers
  • Salaries and wages

Investing Activities

These activities includeany incoming or outgoing cash from a company's long-term investments. Investing activities include:

  • A purchase or sale of an asset
  • Loans made to vendors or received from customers
  • Merger or acquisition payments or credits to cash

Financing Activities

These activities include cash from investors or banks, as well as the use of cash to pay shareholders. Financing activities include:

  • Payment of dividends, which are periodic cash payments to shareholders
  • Payments for stock repurchases, which reduces the number of outstanding shares
  • Repayment of debt principal (loans)

A balance sheetis a summary of the financial balances of a company, while a cash flow statementshows how the changes in the balance sheet accounts–and income on the income statement–affect a company's cash position. In other words, a company's cash flow statement measures the flow of cash in and out of a business, while a company's balance sheetmeasures its assets, liabilities, and owners' equity.

Examples of How the Balance Sheet and Cash Flow Statement Differ

Below are copies of the balance sheet and cash flow statement for Apple Inc. (AAPL)as reported in the 10-Q filing on Dec. 28, 2019.

Balance Sheet

The balance sheet for Apple has the following entries listed for the quarter:

  • Total assets were $340,618 (highlighted in green).
  • Total liabilities were $251,087 (highlighted in red).
  • Total equity was $89,531 (highlighted in gold).
  • Total liabilities and equity were $340,618, (highlighted in blue), which equals the total assets for the period.

The balance sheet above shows a snapshot of Apple's assets and liabilities for the quarter, but you'll notice it does not show the amount of cash that was spent nor the profit or revenue generated for the quarter.

Undoubtedly, Apple recorded cash flow activity as well as activity from the income statement, such as revenue and expenses. However, the balance sheet doesn't show the actual activity from the quarter. Instead, the balance sheet shows the results of what the company owns and owes as a result of that activity.

Cash FlowStatement

Apple recorded the following cash flow activities for the quarter:

  • The cash flow statement starts with cash on hand and net income (in green at the top of the statement).
  • After calculating cash inflows and outflows from operating activities, Apple posted $30,516 in cash from operating.
  • Investing activities were -$13,668 billion (highlighted in red) in part due to purchases of marketable securities for $37,416 billion and purchases of plant and equipment for $2,107 billion.
  • Financing activities was a -$25,407 (highlighted in gold) primarily as a result of share buybacks totaling $20,706 billion for the period.
  • Apple had $41,665 billion in cash flowfor the quarter (in green at the bottom of the statement).

Balance Sheet vs. Cash Flow Statement: What's the Difference? (2)

To highlight the difference between the two statements, we can look at Apple's investing activities, which included approximately $2.1 billion dollars in purchases of property, plant, and equipment. On Apple's balance sheet (shown earlier), the company recorded $37 billion dollars in property, plant, and equipment. That total includes the $2.1 billion purchase for those fixed assets, which was recorded as a cash outflow in investing activities.

An extreme example would be if Apple decided to pay off $70 billion of its term debt, which totals approximately $93 billion listed on the balance sheet. The company would record the cash outlay of $70 billion dollars within the financing activities section of the cash flow statement. Also, the term debt total on the balance sheet would be listed as the reduced amount of $23 billion.

While the cash flow statement shows cash coming in and going out, the balance sheet shows the assets and liabilities that result, in part, from the activities on the cash flow statement.

As an expert in finance and accounting, I bring years of experience and comprehensive knowledge in analyzing financial statements, including balance sheets and cash flow statements, to evaluate a company's financial health and performance. My expertise spans various industries, enabling me to decipher complex financial data and provide insights into the underlying dynamics of businesses.

Let's delve into the concepts outlined in the article "Balance Sheet vs. Cash Flow Statement: An Overview":

Balance Sheet:

The balance sheet is a crucial financial statement that provides a snapshot of a company's financial position at a specific point in time, typically at the end of a quarter or year. It comprises three main components:

  1. Assets: These represent what the company owns and can include cash, inventory, accounts receivable, and fixed assets like property and equipment.

  2. Liabilities: Liabilities encompass what the company owes, including debts, accounts payable, and accrued expenses.

  3. Shareholders' Equity: This represents the net worth of the company, calculated as assets minus liabilities. It includes retained earnings and capital contributed by shareholders.

The balance sheet equation, Assets = Liabilities + Shareholders' Equity, must always balance, ensuring that every financial transaction is accounted for accurately.

Key items listed on the balance sheet include:

  • Assets: Cash and cash equivalents, marketable securities, accounts receivable, and inventory.
  • Liabilities: Debt, rent, taxes, utilities payable, wages payable, and dividends payable.
  • Shareholders' Equity: Retained earnings, representing net earnings not paid out as dividends.

Cash Flow Statement:

The cash flow statement complements the balance sheet by tracking the inflow and outflow of cash over a specific period, usually a quarter or a year. It consists of three main sections:

  1. Cash from Operating Activities: This section records cash generated or used in the company's core business operations, such as sales revenue, operating expenses, and changes in working capital.

  2. Cash from Investing Activities: Here, cash flows related to the purchase or sale of long-term assets, investments, and acquisitions are documented.

  3. Cash from Financing Activities: This section reflects cash flows from borrowing, issuing stock, repaying debt, and paying dividends to shareholders.

Relationship between the Balance Sheet and Cash Flow Statement:

While the balance sheet provides a static overview of a company's financial position, the cash flow statement offers insights into its liquidity and cash management practices. The balance sheet reflects the cumulative impact of past transactions, whereas the cash flow statement captures the actual cash inflows and outflows during a specific period.

In summary, the balance sheet showcases a company's assets, liabilities, and shareholders' equity, while the cash flow statement illustrates how changes in these accounts affect its cash position. Together, these financial statements enable investors, analysts, and creditors to assess a company's financial performance comprehensively.

Understanding the nuances of balance sheets and cash flow statements is essential for making informed investment decisions and evaluating the financial stability and viability of businesses.

Balance Sheet vs. Cash Flow Statement: What's the Difference? (2024)
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