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The Balance Sheet and the Cash Flow Statement are two different financial terms but they both help in judging the financial status of an individual or an organization. The former considers Assets, Liabilities and other owner equities whereas the latter considers the cap inflow and outflow.
Balance Sheet vs Cash Flow Statement
The difference between balance sheet and cash flow statement is that a balance sheet is generally calculated for a year and it pictures the long-term performance of an organization or individual. Cash Flow Statement is usually calculated for three months or so and it reveals the current performance of that entity.
Long-term Investors who wish to load some money on an organization and remain quiet for years consider the former to evaluate the firm’s business dealings. Mutual fund investors who buy and sell frequently evaluate Cash Flow Statement before investing their funds on a company.
So before choosing the financial tool, work on a few factors that are apt for you. Some of them are period of investment(short-term or long-term), the readiness of cash i.e., whether you need the cash to be readily available or as an asset, etc.
Let us look at their differences and uses them in detail below.
Comparison Table Between Balance Sheet and Cash Flow Statement
|Parameter of Comparison||Balance Sheet||Cash Flow Statement|
|What is it?||The financial status of an individual or a company for a particular period||Money flows in and out of the business for a short period.|
|Also Known as||Statement of financial position or statement of financial condition||Statement of cash flows|
|Usually calculated for||a year||a short period such as three months|
|Few Standards to deal with||Generally Accepted Accounting Principle(GAAP), Federal Accounting Standards Advisory Board(FASAB)||International Accounting Standard 7(IAS 7)|
|Previously known as||None||The flow of Fund Statements|
|Income is termed as||Assets and ownership||Cash Inflow|
|Expenses are termed as||Liabilities||Cash Outflow|
|Formula to calculate||Assets – (Liabilities + Shareholders Equity)||Cash inflow – Cash Outflow|
|Considers money resulting from||Assets and liabilities||Operations, Investments and other financial activities|
|Used by||Long-term investors to avoid loses over a few years||Short-term investors to generate money in a month or so|
What is the Balance Sheet?
Balance Sheet represents the financial status of an individual or a company for a specified period, usually, a year. It includes liabilities, assets and other ownership positions of the respective individual or the company.
The assets, in turn, can be fixed assets or current assets. Fixed assets include capital on a property or place that cannot be converted into money quickly whereas current assets such as bank balance, etc are ready-to-use cash or can be quickly converted to money.
It can also be calculated for government entities and non-profitable organizations. In a nutshell, the balance sheet clearly shows the wealthiness of business in monetary terms.
What is a Cash Flow Statement?
It represents the cash flow in and out of the business and is usually calculated for a short period. The cash flow statement helps in judging the ability of an individual or an organization’s bill payment capability.
It is generally calculated and used by people such as creditors who loan money, employees before joining an organization, company directors before answering the investor’s questions, etc. All these entities use this statement to ensure that the organization or the individual can handle money matters without fail.
The money that is an income for the business is considered as Cash Inflow whereas expenses are considered as Cash Outflow.
Main Differences Between the Balance Sheet and Cash Flow Statement
- Balance Sheet reveals the financial status of an organization or individual over a year whereas Cash Flow Statement reveals the cash inflow and outflow over three months or so.
- The former is a weapon to judge an organization’s performance over the long-term and the latter over the short-term.
- Balance Sheet is also called as Statement of Financial Position. The Cash Flow Statement is called as Statement of Cash Flows and was previously called as Flow of Funds Statements.
- Few Standards followed for the former are Generally Accepted Accounting Principle(GAAP), Federal Accounting Standards Advisory Board(FASAB), etc whereas the latter follows International Accounting Standard 7(IAS 7).
- Balance Sheet terms it’s income as Assets and it’s termed as a Cash inflow in Cash Flow Statement.
- Liabilities is the name given to the expenses in the Balance sheet whereas Cash outflow in Cash Flow Statement.
- The former uses the formula [Assets – (Liabilities + Shareholders Equity)] whereas the latter uses the formula [Cash inflow – Cash Outflow] for their calculation.
- Balance Sheets considers the money resulting from assets & Liabilities whereas Cash Flow Statement considers the money from operations, investments, and other financial activities.
- Long-term investors who wish to avoid losses over a few years generally use the Balance sheet to evaluate a company’s performance during the past years. Short-term investors who generate money by buying and selling, frequently use Cash Flow statements to come to know the current performance of a company.
Frequently Asked Questions (FAQ) About Balance Sheet and Cash Flow Statement
What is an inflow in Cash?
An inflow of cash occurs when money or cash is received from an external source. In a business organization, cash inflow mainly occurs through operating activities such as the sale of goods or services.
Other forms of cash inflow relate to investment and financial activities such as funds received from shareholders, investors, or creditors. Besides fundraising, activities like selling of assets and properties also result in an inflow of cash.
What is Cash Outflow examples?
Cash outflow is the money spent or disbursed by a business for various reasons.
Examples of cash outflow are compensation paid to employees, settlement of bills payable to suppliers, payments made against the purchase of assets, extending loans or financial aid to third parties, or investing money in equity markets.
What are the three types of Cash Flows?
The three types of cash flows are:
- Operating Cash Flows: This includes cash inflow and outflow from revenue and expenses associated with day-to-day operating activities of a business concern.
- Investing Cash Flows: Cash generated from investment activities like buying or selling of property, land, and marketable assets like shares and debentures.
- Financing Cash Flows: The cash receipts and payments from financing activities like repayment of loan or debt, distribution of dividends, and issuance of stocks and bonds.
What is Cash Loss in the Balance Sheet?
Cash loss in a balance sheet indicates the net loss arrived by calculating all the cash outflows or expenditures. Expenses that are non-cash in nature like amortization and depreciation are not included for computing the cash loss of a business concern.
What increases Cash Flow?
Cash flow can be increased by improving the operating activities of a business. This includes day-to-day business activities like selling goods and services. Quick clearance of bills receivable against sales and other business activities can accelerate the rate of cash flow.
Also, proper management of current assets can considerably improve cash flow.
Does Cash Flow include the owner’s salary?
Yes, the cash flow of a business includes the owner’s salary. It means the cash flow is calculated before deducting the owner’s salary or compensation.
For this reason, it is also known as the owner’s cash flow.
Money decides the condition of a business and which can be evaluated by various financial tools. Two such tools are the Balance sheet and Cash Flow Statements. The former evaluates an organization or an individual’s wealth over long-term whereas the latter evaluates over a short period.
Both tools help in identifying the sustainability of a company so that one can carry on further investments in that company. Assets, Liabilities, cash inflows and cash outflows are frequently used in their estimations apart from other ownership positions.
If you are one such investor, just decide whether you are going for a long-term or short-term investment over the company. This decision can help you in picking the right financial analysis tool without any confusion.
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