Are you confused about the difference between balance sheet vs cash flow statement? Many people find it challenging to understand the differences between these two financial statements. In this article, Viindoo will distinguish between balance sheets and cash flow statements, helping you understand each statement's purpose and how they can be used in your business.
Overview
A balance sheet and a cash flow statement are two important financial statements that businesses use to track their financial health.
The balance sheet shows a company's financial position, while the cash flow statement shows the inflows and outflows of cash. By understanding both statements, businesses and investors can make informed decisions about investments, financing, and managing their operations.
Learn more about: Balance sheet vs income statement: Which one is more important?
Both balance sheet and a cash flow are important financial statements
What is a balance sheet and the example?
Definition
A balance sheet is a financial statement that shows a company's financial position at a specific point in time, typically at the end of a reporting period. It provides a snapshot of a company's assets, liabilities, and equity.
Assets are resources that a company owns, such as cash, investments, property, plant, and equipment, inventory, and accounts receivable. Liabilities are obligations that a company owes to others, such as loans, accounts payable, and taxes payable. Equity represents the residual value of a company's assets after its liabilities are paid, and it's owned by shareholders.
Balance sheet shows a company's financial position
Example of a balance sheet
Here's an example of a simplified balance sheet:
ABC Corporation Balance Sheet
As of December 31, 2022
Assets
Cash: $50,000
Accounts receivable: $75,000
Inventory: $100,000
Property, plant, and equipment: $500,000
Total assets: $725,000
Liabilities
Accounts payable: $60,000
Short-term loans: $75,000
Long-term debt: $150,000
Total liabilities: $285,000
Equity
Common stock: $300,000
Retained earnings: $140,000
Total equity: $440,000
Total liabilities and equity: $725,000
In this example, ABC Corporation has assets of $725,000, liabilities of $285,000, and equity of $440,000. This balance sheet shows that ABC Corporation is solvent, as its assets exceed its liabilities, and it has a positive equity balance. Investors and creditors can use this information to assess the company's financial position and make informed decisions about investing or lending to the company.
What is a cash flow and the example?
Definition
Cash flow refers to the inflows and outflows of cash in a business over a specific period. It measures how much cash a business generates or spends during a given time frame and is an essential metric for assessing a company's liquidity and financial health.
A cash flow statement is used to track a company's cash flows, which are typically categorized into three main sections: operating activities, investing activities, and financing activities.
- Operating activities: These are cash flows generated from a company's primary business operations, such as sales, collections from customers, and payments to suppliers and employees.
- Investing activities: These are cash flows related to the purchase or sale of long-term assets, such as property, plant, equipment, and investments.
- Financing activities: These are cash flows related to the financing of a company's operations, such as borrowing or repaying loans, issuing or repurchasing shares, and paying dividends.
Example of the Cash flow
Here's an example of a simplified cash flow statement:
ABC Corporation Cash Flow Statement
For the Year Ended December 31, 2022
Cash flows from operating activities:
Cash received from customers: $400,000
Cash paid to suppliers and employees: ($300,000)
Net cash flows from operating activities: $100,000
Cash flows from investing activities:
Purchase of property, plant, and equipment: ($200,000)
Sale of investments: $50,000
Net cash flows from investing activities: ($150,000)
Cash flows from financing activities:
Proceeds from long-term loans: $100,000
Repayment of long-term loans: ($50,000)
Payment of dividends: ($20,000)
Net cash flows from financing activities: $30,000
Net increase in cash: $(20,000)
Beginning cash balance: $50,000
Ending cash balance: $30,000
In this example, ABC Corporation generated $100,000 in cash from its operating activities, spent $150,000 on investments, and raised $30,000 in financing activities. The company had a net decrease in cash of $20,000 over the year, leaving it with $30,000 in cash at the end of the period. This cash flow statement provides investors and creditors with insight into the company's ability to generate cash, manage its operations, and meet its financial obligations.
Company's cash flows has three main sections: operating, investing, financing
Comparison between Balance Sheet and Cash Flow
| Parameters | Balance Sheet | Cash Flow |
| Content | Company's assets, liabilities, and equity | Sources and uses of cash, including cash from operating activities, investing activities, and financing activities |
| Time | Providing a snapshot of a company's financial position at a specific point in time | Inflows and outflows of cash over some time, typically a month or a year. |
| Information provided | Providing information about a company's financial position, including its assets and liabilities, equity, and the relationship between them | Providing information on how a company generates and uses cash and how changes in its cash position impact its financial health. |
| Classified into | Two parts | Three parts |
| Purpose | Providing the financial position of the company. | Helpful in budgeting and forecasting |
Applying software for both the balance sheet vs cash flow statement
Using accounting and finance software can help you generate both balance sheet vs cash flow statements quickly and accurately. Here are the steps to use financial accounting software to analyze both statements together:
Input financial data: The first step is to input all financial data into the software, including income, expenses, assets, and liabilities. This data will be used to generate both the balance sheet vs cash flow statement.
Generate: Use the finance accounting software to generate the cash flow statement and balance sheet. The software will use the data you input to calculate the total assets, liabilities, and equity or inflows and outflows of cash over a specific period of your company
Analyze balance sheet: Analyze those two to understand your company's financial position or uses of cash. Look at the relationship between your company's assets and liabilities, and calculate key financial ratios such as debt-to-equity ratio and current ratio. Or with the cash flow, intelligent software can analyze the operating, investing, and financing activities to understand the sources and uses of cash
Compare balance sheet vs cash flow statement: Comparing to gain a comprehensive understanding of your company's financial position. Look for any discrepancies between the two statements and identify areas where you can improve cash flow or financial health.
In summary, using finance accounting software can help you generate both the balance sheet vs cash flow statement quickly and accurately. Analyzing both statements together can help you gain a comprehensive understanding of your company's financial health and make more informed financial decisions.
Using accounting and finance software can help you generate both balance sheet vs cash flow statements quickly and accurately
Preparing the Balance Sheet vs Cash Flow statement is the need of the company to know the performance of the company. Contact Viindoo via hotline at +84 225 730 9838 for more information about our Accounting software to help with your demands.
FAQs
What is the main difference between a balance sheet and a cash flow statement?
A balance sheet shows a company's financial position at a specific point in time, while a cash flow statement shows how cash moves in and out of a company over a period of time.
Why do investors look at balance sheets and cash flow statements?
Investors look at balance sheets to assess a company's financial position and cash flow statements to understand where a company's cash is coming from and going to.
Can a company has a positive net income but still have cash flow problems?
Yes, a company can have a positive net income but still have cash flow problems. This is because net income is calculated using accrual accounting, which recognizes revenue and expenses when they are earned or incurred, regardless of when the cash is actually received or paid out. Cash flow statements, on the other hand, show the actual movement of cash in and out of a company, which can be affected by factors such as timing of payments and collections.
Can balance sheets and cash flow statements be used together to assess a company's financial health?
Yes, balance sheets and cash flow statements are both important indicators of a company's financial health and should be used together to get a complete picture of its financial position and performance.
