Income Statement and Balance Sheet Differences

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.

Comparative Table

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”The costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more 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 expensesDepreciation ExpensesDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
  • read more 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 earnedThe Interest Income EarnedInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more 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 lineThe Taxes To Reach The Bottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. read more. 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 formatIncome Statement FormatThe standard format for preparing a company’s income statement starts with the sales revenue figure of the business and then adds other income to it. After deducting all business expenses from the total amount of revenue and other income generated, the net profit/loss of the business organization is determined.read more –

Note: The numbers of outstanding sharesNumbers Of Outstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more 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.

  • 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 assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more, Investments in associates & joint ventures, Financial assets, Employee benefits assets, Deferred tax assets, etc.The total of current assets and non-current assetsNon-current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company’s investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more 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 payableSales Taxes PayableSales taxes payable refers to the liability account created when an entity collects sales taxes on behalf of the government and stores the aggregate amount of taxes before paying the concerned taxes authority.read more, income taxes payable, interest payableInterest PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company’s balance sheet.read more, 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 LiabilitiesDeferred Tax LiabilitiesDeferred tax liabilities arise to the company due to the timing difference between the accrual of the tax and the date when the company pays the taxes to the tax authorities. This is because taxes get due in one accounting period but are not paid in that period.read more, 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 StatementCommon Size StatementIn a common size financial statement, each element of financial statements are shown as a percentage of another item. For instance, in case of the Balance Sheet assets, liabilities, and share capital are represented as a percentage of total assets. In the case of Income Statement, each element of income and expenditure is defined as a percentage of the total sales.read more.

  • For each year, Income Statement line items are divided by its respective year’s Top Line (Net SalesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company’s gross sales.read more) number.For example, for Gross ProfitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more, it is Gross Profit / Net Sales. Likewise for other numbers

Interpretation of Colgate’s Income Statement

  • In Colgate, the profit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more (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 MarginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization’s overall profitability after incurring its interest and tax expenses.read more has been in the range of 12% to 14.5%. However, it decreased in 2015 to 8.6%Also, note that the operating incomeThe Operating IncomeOperating Income, also known as EBIT or Recurring Profit, is an important yardstick of profit measurement and reflects the operating performance of the business. It doesn’t take into consideration non-operating gains or losses suffered by businesses, the impact of financial leverage, and tax factors. It is calculated as the difference between Gross Profit and Operating Expenses of the business.read more dropped significantly in 2015.Also, effective tax ratesEffective Tax RatesEffective tax rate determines the average taxation rate for a corporation or an individual. For both, there is a similar formula only with variation in considering variables. The effective tax rate formula for corporation = Total tax expense / EBTread more 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 ReceivablesAccounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year.

  • read more, 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 assetsTotal AssetsTotal Assets is the sum of a company’s current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more.There has been a significant jump in the Long-Term Debt to 52,4% in 2015.Non-controlling interestsNon-controlling InterestsIt generally projects curves on the data sets. For example, to forecast population growth, forming a non-linear relationship between time and growth.read more 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.

Income Statement vs. Balance Sheet Video

This has been a guide to Income Statement vs. Balance Sheet with a step-by-step comparison. Here we also took practical examples of Colgate to highlight the differences between the financial Statement. You may also have a look at the following articles –

  • 4 Differences Between Operating and Net Profit4 Differences Between Operating And Net ProfitOperating profit is derived from gross profit and is the income left after deducting all expenses and costs incurred in the operation of the business. Net profit, on the other hand, is the remaining income after accounting for all cash flows, which can be positive or negative.read moreSole Proprietorship vs PartnershipSole Proprietorship Vs PartnershipA sole proprietorship is an unincorporated entity that does not exist apart from its sole owner. It is not governed by any statutory body. A partnership is two or more people agreeing to operate a business for profit. The Partnership firm is governed by the Partnership Act.read moreNet LossNet LossNet loss or net operating loss refers to the excess of the expenses incurred over the income generated in a given accounting period. It is evaluated as the difference between revenues and expenses and recorded as a liability in the balance sheet.read moreTrial Balance vs Balance Sheet