What Is the Difference Between a Balance Sheet and Cash Flow Statement?

Balance Sheet vs. Cash Flow Statement: An Overview

Two of the three financial statements that companies issue to report their financial performance are the balance sheet and cash flow statement. 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 statement shows 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 sheet lists 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’ Equity

where:

Owners’ Equity=Total Assets minus total liabilities

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; all assets are listed in one section, and their sum must equal the sum of all liabilities and the shareholders' equity.

Below are examples of items listed on the balance sheet:

Assets

• Cash and cash equivalents are liquid assets, which may include Treasury bills and certificates of deposit.

• Marketable securities are equity and debt securities.

• Accounts receivables are the amount of money owed to the company by its customers for product and service sales.

• Inventory is either finished goods or raw materials.

Liabilities

• Debt including long-term debt

• Rent, taxes, utilities payable

• Wages payable

• Dividends payable

Shareholders' Equity

• Shareholders' equity is a company's total assets minus its total liabilities. Shareholders' equity represents the net value or book value of a company. It is the amount of money that would be returned to shareholders if all of the assets were liquidated, and all of the company's debt was paid off.

• Retained earnings are recorded under shareholders' equity and are the amount of net earnings that were not paid to shareholders as dividends. Instead, the money was retained to be reinvested in the business, 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 statement shows 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 statement by 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, and accounts payable are 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 include any 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 sheet is a summary of the financial balances of a company, while a cash flow statement shows 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 sheet measures its assets, liabilities, and owners' equity.