What is the difference between the cash flow statement, the balance sheet and income statement? Why is the cash flow statement important?

When analyzing financials of companies, I always look at the cash flow statement first and spend the most time on that compared to the other statements.  The Income Statement: Answers how are we doing as a business.  It starts with revenue minus expenses to get net income. The Balance Sheet: Is a financial snap shot at a point in time.  In other words, at a given date, what were the Assets, Liabilities and Owners Equity of the company.  For the Cash Flow Statement: the amounts of cash and cash equivalents entering and leaving a company.  It answers the questions of how are operations running, where is the money coming from and how is it being spent. I'll give two examples that will help you understand why I prefer the cash flow statement to analyze companies:  1.  There is freedom within the Income Statement and Balance Sheet to choose how you treat certain transactions.  This creates a situation where two otherwise similar companies have financial ratios that tell a different story.  For example, I can decide if I'd like to capitalize (treat an expense an asset and depreciate it over time) an asset on the balance sheet or if I'd like to expense it on the income statement.  If I expense it, my net income is lower and if you just compare income statements, I appear to be much less profitable.  2.  Depreciation schedules are subjective as well.  You can choose a more conservative schedule which wil show more depreciation expense earlier on in the asset's life or you can have a depreciation schedule that's the same expense each month.  The depreciation expense appears on your income statement each month as a subtraction from revenue.  Two companies that choose different schedules will have different income statements and balance sheets.  On the cashflow statement, you see the actual cash that went in and went out of the business all in one place and the subjective decisions that each company can have do not matter.  Here's an example:  When you are creating a cash flow statement using the indirect method (most popular and easiest to understand method), the first item at the top of the cash flow statement is called Net Income.  The next thing you to do that Net Income figure is, "Add back non-cash transactions".  So look at the depreciation example we talked about above.  The depreciation is a non cash expense because you don't pay anyone a depreciation expense.  So no matter which depreciation schedule I choose, I have to add back my depreciation expense to Net Income.  If you're thinking, "the depreciation expense that is the highest will add more money to net income than the other company", then you're correct.  The company though that has more depreciation expense though, started with a lower net income figure so each company appears to be even on the cash flow statement.  For example in a sample cash flow statement it might look like this:                       Company A            Company B Net Income                   200                      100 Depreciation                   50                      150 Cash From Operations   $250                     $250 In conclusion, cash flow statements take the subjectivity out of the financial statements and give a more level playing field.

Income statement: Shows how much you made (revenue) and how much you paid (expenses) over the year, say from 1/1/2015-12/31/2015Balance sheet: Shows how much stuff you own (assets) and how much stuff you owe (liabilities) as of the end of the year, say 12/31/2015Cash flow statement:  Sometimes your income statement doesn't match the cash coming in and out.  For example, You're a magazine business and sold a 2 year subscription for $30.  The income statement for the year will just include $15 as revenue for the year.  The cash flow statement will include $30. You took out $100 loan.  It hits the balance sheet as debit cash, credit liability and hits the cash flow statement as receiving $100 for financing activities.  But it won't appear on the income statement. Why investors, shareholders, depositors, government regulators, and bank managers need all three. Income statement answers - Is this business doing well?  Did this business make money this year or did it spend more than it made?  Did it make more money this year than it did last year?  What is this business spending money on?  How much do they pay employees? Balance sheet answers - Does this company have a lot of debt?  Does it have enough cash on the balance sheet to pay for the debt?  What does the company own - real estate, equipment?  What does the company owe - debt? Cash flow statement answers - How does this company use cash?  Does the company invest its cash into new equipment?  Or is the company staying afloat by taking out loans and selling off assets?  The company said they are profitable, but does the cash match that or could the company be making up income?

To answer your query, you need to know the importance of each statement. Please read these video articles to understand the importance. http://www.financewalk.com/2013/financial-statement-analysisanalyzing-financial-statements-part1video/ http://www.financewalk.com/2013/financial-statement-analysis-part-2-video/ http://www.financewalk.com/2013/financial-statement-analysis-part-3-video/ http://www.financewalk.com/2013/cash-flow-statement-analysis-analyzing-cash-flow-statements/ Hope this helps. Regards, Avadhut

The main differences are that some of the items in the cash flow statements do not belong in the balance sheet. For example, if you bought a tool that should last 10 years, the timing of how to record that expense differs across the different statements. Here is a brief video with some explanations:

To get the best picture of a company's financial performance and health, it' s crucial to study all three financial statements together. Below is a quick breakdown of the purpose of each statement, key things to pay attention to, and popular metrics that stem from each. Cash flow statement: Why? Looks at how cash has come in and how it has been spent. Pay attention to: Cash flows from operating are extremely important because it shows how much money comes from regular operations. This number is calculated by beginning with net income from the income statement, adding back non-cash expenses (like depreciation) and adjusting for changes to current assets and current liabilities. This number answers questions of profitability according to GAAP, and whether or not the company is actually making cash from operations. Popular metric: Free cash flow is calculated by subtracting capital expenditures from net cash from operations showing how much money the firm generates after money is invested to keep it running and growing, and is popularly used to evaluate pricing for IPOs. http://bit.ly/1lN0OUt   Balance sheet: Why? Gives a snapshot of a company's overall financial condition at a point in time (also known as statement of financial position) Pay attention to: Equity is a good place to start on the balance sheet because business owners strive to increase the value of their ownership stakes. Technically, it is the difference between a firm's assets (what is owned) and liabilities (what is owed). Keep in mind that though total equity may increase, individual shares of ownership may not be so comparing how the equity changes relative to number of shares is a better indication. Assets = Liabilities + Equity. Popular metric: Working Capital = Current Assets - Current Liabilities. Positive working capital is needed to continue operations, but the amount depends on the size, growth, and seasonality of the business. Too much can also potentially mean that not enough capital is invested to grow the business. http://www.sageworksinstitute.org/blog/what-are-the-key-metrics-in-a-balance-sheet-and-what-do-they-mean/ Income statement: Why? Provides sales and profitability trends for a specific period (also known as profit and loss statement) Pay attention to: How the company presents their earnings. Many use non-GAAP measures of earnings which portrays some expenses as only one-time. These minor adjustments can hide a company's true bottom line. Popular metric: Net margin = net profit / revenue. It is the percentage of every sales dollar the company pockets after all expenses have been paid. While many focus on a company's sale performance, net profit margin accounts for how much money a company may be losing even if sales are increasing. http://www.sageworksinstitute.org/blog/what-are-the-key-metrics-in-an-income-statement-and-what-do-they-mean/

Balance Sheet: Statement of Assets and Liabilities on a particular date, For Eg.: 31/12/2012 Income Statement: Statement of Sales, Purchases, Income and Expenses only for that financial period to which it belongs to. Actual flow of cash doesn't affects this statement. For Eg.: 01/01/2012 to 31/12/2012. It includes transactions related to "Nominal Accounts" Cash Flow Statement: Reports Actual inflow and outflow of cash.related to income, expenses, assets or liabilities. Purpose of this statement is to find out the closing cash balance with the business at the end of the year, i.e.measuring the liquidity position of any business. Thanks CA Yash Mantri http://www.itesatsyscraft.com

Cash flow information is important because it gives stakeholders information about the entity's ability to meet its short term liabilities. Organizations with losses but with positive cash flows can survive in short term but there's a chance that organizations may succumb despite having profits and huge assets in their Income Statements and Balance Sheets respectively but poor cash flow situation. In short, it means that they don't have cash and cash equivalents to pay their debtors hence forced insolvency.

Balance sheet is a snap shot of business. It indicates condition of a business at a particular point in time. It includes information on assets, liabilities and equity and hence a good indicator of a business`s health. balance sheet lasts until a business is closed.  It is a permanent statement. Income statement provides information about earnings of a business over a particular period o f time. Income statement expires after one period and a new income statement is prepared for a new period.  Cash flow statement provides information about actual cash movements. As accounting is mostly accrual basis it does not reflect the actual cash movements. Statement of cash flows is very important for finance people as they rely on cash rather than accounting figures to take decisions.

The Balance Sheet. This one tells you what the company has and how he got it. It starts from when the company was founded until today its cumulative.Income Statement. How the company did in a period of time. What the expenses and incomes where in that period.Cash flows statement. It tells you where the money got from and where is being spent. Also it’s from a period of time. It can de monthly, quarterly, annually, etc. The importance of the cash flow is that it tells you where the money comes from, it’s not the same to ear some dollars from operation than from a one-time action or from selling assets. As an investor you need to analyze the three financial statements, you cant get to any conclusion by only seeing one or two.