Income Statement vs Balance Sheet

Publication Date :

06 May, 2017

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Table Of Contents

Income Statement and Balance Sheet Differences

An income statement is one of the company's financial statements that provide a summary of all the revenues and expenses over the period to ascertain the profit or loss of the company. In contrast, a balance sheet is one of the company's financial statements that present the shareholders' equity, liabilities, and the company's assets at a particular time.

The income Statement provides the company's business performance during the given period. In contrast, the balance sheet is a snapshot of the company's assets and liabilities at a given time.

Income Statement and Balance Sheet Differences

Comparative Table

Items	Income Statement	Balance Sheet
What is it?	The Income Statement shows how the business has performed for the period under consideration.	The balance sheet gives 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 activities (selling merchandise, selling services) Costs and Expenses 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 due to past transactions or events. Assets are further divided into two types –Current Assets and Long Term Assets. Liabilities - Liabilities are obligations owed to others as of the balance sheet date. They arise from the present obligations of a particular entity to transfer assets or provide services to other entities in the future due to past transactions or events. Equity - 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.
Period	The income statement is prepared for some time. For example, in its 10K Filings, Colgate reports income statements between 1st January to 31st December.	On the other hand, the balance sheet is at a specific point in time. Colgate reports it balance sheet as of 31st December.
Financial Analysis	Gross margin, Operating Margin, Net Margin, Operating Leverage, Financial Leverage, ROE (uses Equity from Balance Sheet)	Current Ratio, Quick Ratio, Cash Coverage Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Payables Turnover Ratio, DSCR 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	The 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 Video Explanation

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

First, we will start with “total sales/ revenue.” Total revenue can be calculated by multiplying the total units produced with the price per unit. This is called "gross revenue." From gross revenue, sales returns/discounts are being deducted, giving us "net revenue."
After that, we will include "cost of sales" which is the cost directly related to sales. After deducting the “cost of sales” from the “net revenue,” we will get “gross profit/ loss.”
Operating expenses are expenses that are not directly related to sales. From "gross profit/ loss," operating expenses (selling & administrative expenses, personnel salaries, research & development expenses, etc.) would be deducted. Then, we will also deduct the depreciation from the gross profit/ loss. Deducting operating and depreciation expenses from gross profit/ loss would give us operating profit or EBIT (Earnings/ Loss before interest and taxes). Depreciation expenses from gross profit/ loss would give us operating profit or EBIT (Earnings/ Loss before interest and taxes).
Now two things need to be done. First, the interest expenses need to be deducted from the EBIT, and second, the interest income earned from the "savings account" of the company would be added back. And we will get PBT (Profit/ Loss before taxes).
Finally, we will deduct the taxes to reach the bottom line. It can be either "net profit" or "net loss," which is also called "profit/ loss after tax."
After that, we need to calculate the EPS. For example, if we need to calculate the EPS of Company MNC and we know that the “net profit” is $500,000 and the number of “outstanding shares” is 50,000, the EPS would be = ($500,000/50,000) = $10 per share.

Let's have a glance at the pictorial representation of income statement format –

Balance Sheet vs Income Statement - Income Statement Format

Note: The numbers of outstanding shares 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

After current assets, we will write down "non-current assets," which can't be converted into cash within a year. Non-current assets include - Property, plant and equipment, Goodwill, Intangible assets, Investments in associates & joint ventures, Financial assets, Employee benefits assets, Deferred tax assets, etc.
The total of current assets and non-current assets will be called "total assets."
After total assets, we will include "current liabilities." Under current liabilities, we will include - Financial Debt (Short term), Trade and other payables, Accruals and deferred income, Provisions, Derivative liabilities, Current Income Tax Liabilities, Liabilities directly associated with assets held for sale, accounts payable, sales taxes payable, income taxes payable, interest payable, bank overdrafts, payroll taxes payable, customer deposits in advance, accrued expenses, short-term loans, current maturities of long-term debt, etc.

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 -

Colgate Example to Differentiate

For interpreting the Income Statement and Balance Sheet, we use Vertical Analysis or Common Size Statement.

For each year, Income Statement line items are divided by its respective year's Top Line (Net Sales) number.
For example, for Gross Profit, it is Gross Profit / Net Sales. Likewise for other numbers

Vertical Analysis of Colgate Income Statement

Interpretation of Colgate's Income Statement

In Colgate, the profit margin (Gross Profit / Net Sales) has been in the range of 56%-59%.
We also note that SG&A decreased from 36.1% in 2007 to 34.1% in the year ending 2015.
We note that Net profit Margin has been in the range of 12% to 14.5%. However, it decreased in 2015 to 8.6%
Also, note that the operating income dropped significantly in 2015.
Also, effective tax rates jumped to 44% in 2015 (from 2008 until 2014, it was in the range of 32-33%).

Interpretation of Colgate's Balance Sheet

For each year, Balance Sheet line items are divided by its respective year's Top Assets (or Total Liabilities) number.
For example, for Accounts Receivables, we calculate as Receivables / Total Assets. Likewise for other balance sheet items

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.

On the liabilities side, there can be many observations we can highlight. Accounts payable decreased continuously over the past 9 years and currently stands at 9.3% of the total assets.
There has been a significant jump in the Long-Term Debt to 52,4% in 2015.
Non-controlling interests have also increased over the period of 9 years and are now at 2.1%

Conclusion

Balance sheet vs. Income Statement go hand in hand. If we only concentrate on the balance sheet, we will not know about the bottom line. And if we only look at the income statement, we would miss out on the holistic picture of the company's financial matters.

These two statements will help you calculate most of the ratios as an investor. 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. So, you need to know how to look at both simultaneously.