Difference between Cash Flow Statement and Balance Sheet

Cash flow statement and balance sheet both are important financial statements as they represent the financial position of the company; however they both are different in terms of information which they carry for investors. Cash flow statement is like Email because Email is used for mailing purpose only in the same way, cash flow statement is used for cash transactions only while balance sheet is like the internet which can be used for variety of purposes, in order to understand it better let’s look at some of the important differences between cash flow statement and balance sheet –

  1. Cash flow statement as the name suggest is a statement of cash which reveals the cash position of the business between two financial years whereas balance sheet reveals the overall financial position of the business in terms of profits and net worth of the business on a particular date which is usually at the end of the financial year.
  2. Cash flow statement tells whether the company has excess cash or whether it has nil or negative cash, although negative cash is not a bad thing because it may be possible that cash is deployed for some productive activity still it requires close scrutiny. While balance sheet tells whether the company is in net profit or net loss, if the company has a net profit then it may be considered as satisfactory however if the company has a net loss than it is a matter of concern and corrective steps should be taken immediately.
  3. Cash flow is statement is narrow in scope as it covers only cash aspect of the business whereas balance sheet is much wider in scope as it includes many things including the cash or liquidity position of the company.
  4. Cash flow statement is easy to understand and therefore person who does not have financial background can also understand it whereas balance sheet is more technical in nature as it involves many variables also accounting conventions and principles have to be flowed while preparing the balance sheet which is the reason why balance sheet is not easy to prepare and also difficult to understand.
  5. Cash flow statement can be classified as cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. However in the case of balance sheet there is no such classification rather before preparing balance sheet first journal entries are prepared which is followed by ledger, trading account, profit and loss account and finally balance sheet is prepared.

As one can see from the above that both cash flow statement and balance sheet are very different from each other, however if one want to know about the company in detail then one should examine both cash flow statement and balance sheet so that both liquidity and profitability of the company can be ascertained accurately.

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