How Do the Income Statement and Balance Sheet Differ? (2024)

Companies produce three major financial statements that reflect their business activities and profitabilityfor each accounting period. These statements are the balance sheet, income statement, and statement of cash flows. The cash flow statement shows how well a company manages cash to fund operations and any expansion efforts. In this article, we'll examinethe balance sheet and income statement and their differences.

Balance Sheet

Investors and creditors analyze the balance sheet to determine how well management is putting a company's resources to work. The balance sheet shows assets, liabilities, and shareholders' equity. Total assets should equal the sum of total liabilities andshareholders' equity. The liabilities section reflects how those assets are financed. Shareholders' equity isthe difference between assets and liabilities, or the money left over for shareholders for the company to repay all its debts.

To best analyze the keyareas of the balance sheet and what they tell us as investors, we'lllook at an example.

Example: Apple Inc.

Below is thebalance sheet for Apple (AAPL) at the end of its 2017 fiscal year.

Current Assets

The top section contains current assets, which are short-term assets typically used up in one year or less.

  • Total current assets were $128.6 billion (highlighted in blue).
  • Cash came to roughly $20.3 billion.
  • Marketable securities(short-terminvestments) approached$54 billion.
  • Accounts receivable is money owed to Apple for selling its products and services and came to $17.8 billion. A receivable could be due in 30, 60, or 90 daysdepending on the agreed terms. Investorswant to see receivables increase over time, as this indicates rising sales. Butwe don't want to seeaging receivables.
  • Inventories of $4.8 billionmight be raw materials or supplies used in making products or finishedgoods waiting to be sold or shipped.

Long-term Assets

Next on the balance sheet are long-term assets.

  • Long-term investments totaled $194.7 billion.
  • Property, plant, and equipment (PPE) are calledfixed assetsbecause they're notconsumed within oneyear and they generaterevenue over the long term. Apple recorded $33.7 billion in PPE.
  • Other assetsand intangible assets,which include trademarks and intellectual capital, round out the asset section.
  • Total assets were $375.3 billion at the end of Apple's 2017 fiscal year.

How Do the Income Statement and Balance Sheet Differ? (1)

Current Liabilities

Current liabilities are short-term liabilities due within one year.

  • Current liabilitiestotaled $100.8 billion (highlighted in purple).
  • Accounts payable are short-term debt owed by Apple to suppliers, which came to$49 billion.
  • Accrued expenses are expenses yet to be paid, but have a high probability of being paid. Apple recorded $25.7 billion in accrued expenses.

Long-term Liabilities

Not all of Apple's long-term liabilities are broken out,but they typically include:

  • Debt includinglong-term debtandbank indebtedness, which totaled $97 billion for Apple.
  • Rent, taxes, and utilities payable.
  • Wages payable.
  • Dividends payable.

Shareholders' equity

  • Retained earningsare themoneynot paid out asdividends, but heldback to be reinvested in the business or pay offdebt. Apple recorded $98.3 billion in retained earnings.
  • Shareholders' equity is the sum of total assets minus total liabilitiesand is helpful incalculating a company'sfinancial health. Shareholders' equity represents the net value or net worthof a company, whichfor Apple was $134 billion. This is the money left over for shareholders, assuming the company was to pay off all liabilities in the event ofliquidation.

Income Statement

The income statement, often called the profit and loss statement, shows the revenues, costs, and expenses over a period which is typically a fiscal quarter or a fiscal year.The income statement tells investors whether a company is generating a profit or loss. Also, the income statement provides valuable information about revenue, sales, and expenses.

J.C. Penney Company

Below is the income statement for J.C. Penny (JCP) for its fiscal year ending Feb. 3, 2018. The top section includes total revenue or sales for the period.

  • Net sales (i.e. revenue) came to $12.5 billion. Sales and revenue are also called the top line due to their location at thetop of the income statement.
  • Cost of Goods Sold was $8.17 billion. This represents the costs of producinggoods and services during the periods. COGS are direct costs and are only the expenses involved in the production process.
  • Selling, general, and administrative costs are the other expenditures not directly involved in production. For J.C. Penney, SG&A was $3.4 billion.
  • Total costs or expenses were $12.39 billion.
  • Operating income was $116 million after subtracting total expenses from total revenue.
  • Net interest expense of $325 million represents the cost of debt servicing and put J.C. Penney in the red for the year.
  • Net income for the year was a loss of $116 million. Net income is also called net profitor the bottom line because it's the final number and located at the bottom of the income statement.

How Do the Income Statement and Balance Sheet Differ? (2)

J.C. Penney is a great example of the importance of looking at the complete financial picture. Although $12.5 billion in revenue appears impressive, debt servicing costs meant the company took a loss for the year. It's worth noting that examining the financials of any companyworks best when comparing over multiple periods and against other companieswithin the sameindustry.

The Bottom Line

The balance sheet displays what a company owns (assets) and owes (liabilities), as well as long-term investments. Investors scrutinize the balance sheet for indications of the effectiveness of management in utilizing debt and assets to generate revenue that gets carried over to the income statement.

The income statement shows the financial health of a company and whether or not a company is profitable. Both revenue and expenses are monitored closely. It's crucial for management to grow revenue while keeping costs under control. For example, revenue might be growing, but if expenses rise faster than revenue, the company may eventually incur a loss. Investors and analysts keep a close eye on the operating section of the income statement to gauge management's performance.

However, investors and analysts scrutinize the balance sheet just as closely, as both the balance sheet and income statement together provide a fuller picture of a company's current health and future prospects.

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Now, let's dive into the concepts mentioned in the article you provided.

Balance Sheet:

The balance sheet is one of the three major financial statements produced by companies. It provides a snapshot of a company's financial position at a specific point in time. The balance sheet consists of three main sections: assets, liabilities, and shareholders' equity. It shows how a company's resources are being utilized and how they are financed.

  • Assets: Assets represent what a company owns or controls. They can be categorized as current assets (short-term assets typically used up in one year or less) and long-term assets (assets with a longer useful life). Examples of assets include cash, marketable securities, accounts receivable, inventories, property, plant, and equipment (PPE), and intangible assets like trademarks and intellectual capital.

  • Liabilities: Liabilities represent what a company owes to others. They can be categorized as current liabilities (short-term liabilities due within one year) and long-term liabilities (liabilities with a longer repayment period). Examples of liabilities include accounts payable (short-term debt owed to suppliers), accrued expenses (expenses yet to be paid), long-term debt, and other payable items like rent, taxes, and utilities.

  • Shareholders' Equity: Shareholders' equity represents the residual interest in the assets of a company after deducting liabilities. It is the difference between total assets and total liabilities. Shareholders' equity can include items like retained earnings (profits not paid out as dividends), additional paid-in capital, and other equity components.

Income Statement:

The income statement, also known as the profit and loss statement, provides information about a company's revenues, costs, and expenses over a specific period, typically a fiscal quarter or year. It helps investors and stakeholders understand whether a company is generating a profit or a loss.

  • Revenue: Revenue, also referred to as net sales, represents the total amount of money a company earns from its primary operations. It is often considered the top line of the income statement. Revenue can come from the sale of goods, provision of services, or other sources.

  • Expenses: Expenses represent the costs incurred by a company in its operations. They can be categorized as cost of goods sold (direct costs associated with producing goods or services), selling, general, and administrative costs (other expenditures not directly involved in production), and other expenses. Examples of expenses include salaries, rent, utilities, marketing expenses, and interest expenses.

  • Net Income: Net income, also known as net profit or the bottom line, is the final result after subtracting total expenses from total revenue. It represents the profit generated by a company during a specific period. A positive net income indicates profitability, while a negative net income indicates a loss.

Understanding both the balance sheet and income statement is crucial for assessing a company's financial health and performance. The balance sheet provides insights into a company's assets, liabilities, and shareholders' equity, while the income statement shows the revenue, costs, and expenses. By analyzing these statements together, investors and analysts can gain a fuller picture of a company's current health and future prospects.

I hope this information helps! If you have any further questions, feel free to ask.

How Do the Income Statement and Balance Sheet Differ? (2024)
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