Which financial statement displays the revenues and expenses for a period of time?

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A balance sheet displays what a company owns, what it owes, and its shareholders' equity at a particular point in time, while an income statement displays what the company's revenues and expenses, gains and losses are over a period of time. Learn more about the value of each.

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Companies release financial statements for each accounting period. The most often consist of the:

• Balance sheet: provides a snapshot of a company’s assets and liabilities at a given point in time which is usually at the end of an accounting period
• Income statement: provides a picture of a company's performance over a specific time period
• Cash flow statement: displays how a company manages its cash.

These statements are viewed by the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), tax authorities, regulators, potential investors, and competitors.

What is an Income Statement?

Also known as a profit and loss (P&L) statement, an income statement summarizes a company's financial performance over a specific period of time. It displays revenues, the cost of goods sold, and the net profit attributable to shareholders.

Investors and lenders compare the income statements from different periods to determine a company's performance. Various ratios can be created from the data included in an income statement. These include:

• The profit margin ratio: which displays a company's profitability in relation to its sales and expenses
• The price-earning and return-on-equity ratios: display the efficiency of a company's capital allocation
• The times-interest-earned ratio: measures a company's margin of safety when meeting its debt payments.

Income Statement Example

As an example, we're going to take a look at Microsoft Corporation's FY22 Q1 income statement:

MSFT FY22Q1 income statement (Microsoft Corp.)

What’s on a Financial Income Statement?

An income statement includes:

• Revenue: the total income generated during a specific period, it is divided into operating revenue or revenue generated from the core activities of a business, and non-operating revenue, such as interest income and rental earnings, at $45,317 million
• Realized gains and losses: also known as "other income," it is one-time, non-recurring gains arising from the sale of real estate, minority holdings in other companies, and subsidiary companies
• Expenses: costs incurred during normal business and includes the cost of goods sold, which is the cost of materials and labor used in the production of goods and services, at $13,646 million
• Net income/loss: also known as the bottom line, it is determined by subtracting total expenses from total revenue, at $20,505 million.

What is a Balance Sheet?

A balance sheet is a "snapshot" of what a company owns and what it owes on a particular date. For example, a company's financial statements for the month of September will contain a balance sheet as of September 30th and an income statement for the entire month of September.

A balance sheet reports three categories:

• Assets
• Liabilities
• Shareholders' equity.

Investors use a company's balance sheet to determine how effective that company's management is in using its assets and debt to generate revenue. That revenue then appears on the company's income statement. An income statement displays a company's revenue and expenses, its profit and loss.

Assets are what a company owns and include property, cash, equipment, and things such as trademarks. Liabilities are what a company owes and include long-term and short-term debt. Shareholders' equity includes everything left over. A company's value, or worth, is determined by subtracting its liabilities from its assets.

Balance Sheet Example

We're going to look at Microsoft Corporation's FY22 Q1 balance sheet.

MSFT FY22 Q1 balance sheet (Microsoft Corp.)

What's on a Balance Sheet?

A balance sheet is divided into sections that display:

1. Current assets: typically listed in the order of their liquidity, that is, those assets that can most easily be converted into cash; assets included are cash, inventory, and property
2. Total assets: should equal the sum of total liabilities and shareholders' equity.
3. Current liabilities: include a company's taking out a loan, issuing shareholder equity, or taking money from retained earnings
4. Total liabilities: a company’s total debts or obligations which include accounts payable, taxes owed, loan debt, and outstanding wages.
5. Shareholders' equity: the amount of money that was originally invested in the company plus any retained earnings minus any distributions made to shareholders, it is the difference between assets and liabilities or the money left over for shareholders should the company repay all its debts.

In order for a company's balance sheet to be "balanced", its total assets must equal its total liabilities plus equity:

Assets = Shareholders' Equity + Liabilities

1. Balance Sheet Current Assets Section

• Cash and cash equivalents: the value of the cash held by a company and the value of cash equivalents which include marketable securities and short-term deposits, at $19,165 million in the example above
• Short-term investments (marketable securities): at $111,450 million
• Accounts receivable: money that is owed to a company for goods and services that have been delivered, but not yet paid for, it could be due in 30, 60, or 90 days, and while investors want to see rising receivables, they don't want to see long-term ones, at $27,349 million
• Inventories: finished products ready for sale and any raw materials intended for the production of goods or services, at $3,411 million
• Total current assets: at $174,326 million.

2. Balance Sheet Long-Term Assets Section

• Property and equipment: also known as PPE for Property, Plant and Equipment, they are long-term investments of greater than a year and that can't be turned into cash quickly, at $63,772 million
• Equity investments: $6,393 million
• Intangible assets: includes trademarks and intellectual property, at $7,794 million.

3. Balance Sheet Current Liabilities Section

Current liabilities are short-term liabilities that are due within one year and include:

• Accounts payable: a company's outstanding debt owed to suppliers or vendors for goods and services delivered, at $14,832
• Accrued compensation: any wages yet to be paid at $6,894 million
• Total current liabilities: at $80,528 million.

4. Balance Sheet Long-Term Liabilities Section

• Long-term debt: money owed to banks, lenders or suppliers, at $50,039 million
• Operating lease liabilities: includes rent, taxes, and utilities at $10,050 million
• Total liabilities: $183,440 million.

5. Balance Sheet Shareholders' Equity Section

• Shareholders' equity: is a company's net value or net worth, and is the money shareholders would receive if all the company's liabilities were paid off, at $151.978 million
• Retained earnings: that portion of the net income that hasn't been distributed to shareholders as dividends, it is intended to be re-invested or used to pay off debt, at $66,944 million.

Analyzing a Balance Sheet vs. Income Statement

A balance sheet provides data to create the current ratio, debt-to-equity ratio, and return on shareholders' equity ratio. An income statement contains the data to create ratios including the:

• Gross margin
• Operating margin
• Price-to-earnings
• Interest coverage ratios

Investors and shareholders use income statements to assess a company's current performance and future prospects. Lenders typically pay more attention to a company's balance sheet than its income statement because they are interested in what assets can be used as collateral.

Cash Flow Statement

During a given period, a cash flow statement displays the cash a company made through its operations, investments, and financing. The sum of these three is the company's net cash flow.

A cash flow statement also displays cash outflows for business activities and investments. This statement helps investors gauge the value of a company's stock or the company as a whole.

Bottom Line

Both balance sheets and income statements are invaluable for investors when it comes to analyzing the performance of companies. They should each be used to better understand a company's business model and strength.

This article was written by

Marcia is a former high school math teacher, technical writer, author, and programmer. She stays on top of worldwide news about science, government policies, finance, infrastructure, and medical issues. She is always "sniffing the wind" for the latest trends and directions, and keeping her readers abreast of these developments.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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