Question

What are the differences and similarities among the balance sheet statement, income statement, cashflow statement and retained earnings statement?

Answer 1

Each form of financial statement has different data and different purposes. Following is the brief information on these 4 types of financial statements along with differences between them.

The Balance Sheet Statement

It is a snapshot of the financial position of a business or organization at a specific moment in time. The purpose of this is to demonstrate a company’s financial position and its solvency. It includes the following:-

• Assets – The things Business Owner owns or controls which add value to the business like cash & bank balances , inventory, Furniture & other Equipment)
• Liabilities – The things the business owner owes to someone else like Bank Loans, accounts payable etc.
• Equity – The Remaining Capital the Business owes to the owner.

Income Statement

It reports the net profit or loss for a specific period of time.The purpose is to show how profitable a company is. It includes the following:-

• Income – What a business has earned (Sales,Dividends, etc.) for the given time period
• Expenses – What a business has paid out in that time period (Salaries,Rent, etc.)

Cash Flow Statement

It shows how cash is moved around the business or organization during a specific time period. The purpose is to display cash inflows and cash outflows from operating, investing and financing activities. It includes the following:-

• Operating activities – Cash generated from the sale of products or services in the core business.

• Investing activities – Cash spent or received on buying & selling investments e.g. New equipments etc.

• Financing activities – Cash flow from financing such as cash from a loan received or dividends paid etc.

Retained Earnings Statement

It gives details about the movement of owner’s equity over a period of time.The purpose is to explain changes in retained earnings between the prior and current balance sheet date.It includes the following:-

• Net profit or loss
• Movement in share capital reserves
• Dividend payments
• Other gains and losses (e.g. changes in revaluation reserve)

The four financial statements have some overlapping, as each one of them uses different data to tell a different story for a different purpose. All four together represents the financial health and performance of the organization.