At the risk of sounding dumb, I’ve re-read these flashcards a million times and for the life of me cannot distinguish between the, “Big 3 Accounting Statements”. Is it just me? What are the major differences between the three?
Profit & Loss :
financial statement that summarizes an enterprise’s revenues and expenses over a period of time such as a month, quarter, or year
balance sheet is taken as a snapshot at a specified time such as the end of the year; what you own and what you owe and the difference between the two, which is called net worth
Cash Flow Statement:
The amount of cash coming into and going out from an enterprise; used to determine the viability of the enterprise at a given time, particularly whether or not it pays its bills.
Seems like they all take a period of time and see the money going out/coming in to determine profitability of the business. What am I clearly missing?
This is a really good questions because these three items are all very similar. They are all accounting statements which show revenue.
Just as you have summarized, “they all take a period of time and see the money going out/coming in to determine the profitability of the business”. There are some subtle differences however, in particular on what they are used to determine.
The Profit & Loss statement is taking the values and summarizing them to show how much money the firm has gained and loss. It’s specifically looking at the overall amount to determine a profit or loss.
Balance Sheet is showing what the firm has finance wise and what the firm owes. It may includes debts and bills to be paid but which have not been yet. A very good example of a balance statement is your credit card statement you receive each month. It’s going to have more detail and individual transactions than a profit & loss statement.
The Cash Flow Statement actually takes information from the Balance Sheet. Some help from Wikipedia explains the cash flow statement as:
So it is literally taking the data from the balance statement and using it show how these exchanges effect the firm’s finances. It is also looking at the literal flow of cash, not what is owed or the balances.
Try to focus on what you might use these documents for. For example, if a question asked what financial statement you would want to look at to determine how much money a firm has made or lost in a year you would answer “profit & loss statement”
The Cash Flow Statement used to be called the “Flow of Funds” statement. If a question uses the word “flow” or asking what you would use to see & analyze the funds going out and into the firm you would know the answer is “Cash Flow Statement”.
And lastly, if the question is asking you what document you would use to see what the firm owes versus what they are billing for you would answer that they should use the balance sheet. I think that the balance sheet would be particularly helpful in determining the firm’s overhead as well, where-as a cash flow statement would be used not necessarily to determine the firm’s overhead, but rather to evaluate if the firm is financially viable based on the overhead determined by the the balance statement.
Hopefully this helps, and reading the page I just wrote wasn’t too painful! If you’re still confused, please look at some of the below resources:
I found the below AIA lunch and learn presentation which has very general examples of each of these:
The below website also has some good explanation of financial statements:
And last but not least, take a look at the business plan provided in the “lecture slides”. It has a really detailed example of projected profit & loss and balance sheets.