Net income vs Comprehensive income

Net income vs Comprehensive income is not a battle or competition. It is a comparison we need to make. Why? Because people often confuse these two terms. If you’re just getting started in finance, then read this carefully. We’ll keep this article as concise and straightforward as possible. These are essential terms that you should know even if you’re working in marketing and reporting.

We have discussed comprehensive income and financial statement in previous articles. So, this time, we will tackle the main differences between comprehensive income and other types of financial instruments.

Net income vs Comprehensive income
Net income vs Comprehensive income is not a competition, these are essential terms that you should know.

You’ve been following our latest articles, right? We assume the answer is yes. So, you already know the basics of what comprehensive income is. But what about net income vs comprehensive income?

Comprehensive income is mostly associated with returns and market value. Moreover, CI predicts future cash flow and income. However, it cannot predict net income. So, is comprehensive income a better measure of firm performance than net income? Research suggests that it isn’t. Therefore, you might feel entitled to say net income is better. Let’s see!

Net Income vs Comprehensive Income: A Perspective

So, as a business, you need resources and assets to keep things moving. Out of the numerous operations a company runs, you get the net income. This figure can be both negative and positive. It basically represents the net gain or loss of your business over a specific period. So, net income originates from a company’s operations; it is realized gain and loss. Comprehensive income comes from non-owner sources, and it is unrealized gain or loss. Therefore, here you’ve got your first difference.

Revenue and Business Expenses

Producing revenue is not free. We’re sure you already know that. So, to earn money, you’ve first got to spend money. That’s how you’ve got business expenses. These costs produce benefits in the long run. However, they can also pose as liabilities. Just as net income, you record business expenses for a certain period.

Revenue is what your business earns from its main operations. It could be selling a product or a service. Now, you subtract costs from revenue. The result is net income or a net loss. Remember we said net income could be both positive or negative? When it’s negative, we call it a net loss. It’s simple, yes.

Accountants report both revenue and costs on the financial statements. However, there are two types of revenue and costs. The first type is the realized revenue. This means it has been completed. The money’s in the bank. The second type is the collectible revenue or costs. These are not completed transactions. The money’s not in the bank yet. However, analysts can use the fluctuating value of these assets to report on the company’s total worth. The unrealized gains and losses are equity.

Comprehensive income is net income plus other types of income. This is a catch-all phrase that defines a lot of assets and possibilities. These assets usually derive from non-owner sources. Most of them fall into the investment category.

Investments are assets with a fluctuating value. They depend a lot on the market prices and exchange rates. However, you cannot report them as revenue or losses until you sell those assets. So, you report them under the umbrella term of comprehensive income. Comprehensive income is volatile as opposed to net income. So, this is pretty much comprehensive income vs profit and loss.

Are Dividends Comprehensive Income?

So, what about comprehensive income and dividend? First, let’s look into dividends and how they’re reported. If you declared dividends but have not yet paid them, they should appear on the balance sheet. They are considered liabilities. However, dividends are not expenses. Consequently, they won’t appear on the income statement.

So, now let’s get back to comprehensive income. We know it represents the sum of realized and unrealized gains and losses. So, does it also include dividends?

Dividends are not expenses. They do not affect the company’s net income. Yes, they are part of the net income. However, they do not cause the net income to go down or up. Dividends represent a choice that the company makes. It’s basically what the company decides to do with its net income.

Now the question hits. Are dividends included in comprehensive income? The simple answer is “No.” Why? Dividends are transactions between the company and its shareholders. It’s cash flow, so it’s realized. This is why you will always find dividends in the shareholders’ equity statement. What is that? Let’s take a closer look.

The Stockholders’ Equity Statement

The stockholders’ equity statement is a general-purpose financial statement. It shows how equity changes from start to finish. This statement includes:

  • common stock
  • net income
  • dividends
  • paid-in capital

In short, this statement records how all the equity is distributed and calculated. You hold such a statement from day 1 of the fiscal year to the last day of the 12th month. There are four sections to the stockholders’ equity statement.

First, there’s the beginning balance. Then comes the additions section. Here, you will find all the new investments coming in. If the company records net losses, you add a subtraction section to the statement. You include the net loss in this section, along with the dividends paid to owners. The last section of the statement is, of course, the ending equity balance.

Comprehensive income and other comprehensive income

Comprehensive income and other comprehensive income are not the same things. CI is the umbrella term. OCI is a more detailed account of all the non-owner sources of income that might affect a company’s value.

Net Income and Loss under Comprehensive Income

The IFRS (International Financial Reporting Standards) regulates how you should report all of these financial details. They provide quite a lot of leniency when it comes to profit, loss, and comprehensive income. You can report them together or separately. The main goal is to have a final statement that is understandable and comparable.

It is quite challenging to deal with comprehensive income or loss on a conceptual level. OCI should not be just a disposal bin of everything that you cannot conceptualize financially.

What About Operating Income?

Another comparison that we should make is comprehensive income vs operating income. We already know what comprehensive income is. We have discussed it a lot so far. However, do we know what operating income is?

Operating income represents earnings before interest and taxes. Fundamentally, it is what remains after the operational costs. These costs can be direct or indirect.

So, for example, your company has sold products worth $135,000 in one year. However, the cost of these sales is $88,000. You pay $7,000 for marketing. Another $15,000 goes into technology and content. For general and administrative purposes, you also pay $3,000. Furthermore, let’s assume you have some other operating expenses of $4,000. So, the total of your operating expenses is $117,000. We subtract $117,000 from net sales, and we get $18,000. This is the operating income.

So, there are three ways to calculate operating income. The first one is the above. Operating income equals total revenue minus direct and indirect costs.

Nevertheless, you can calculate operating income as follows—gross profit minus operating expenses minus depreciation minus amortization. The result is operating income.

The third way is a bit easier. Operating income can be the sum of net earnings, interest expense, and taxes.

Retained Earnings and Net income

The last financial concept on our list is retained earnings. Comprehensive income vs retained earnings is another comparison we need to make.

Retained earnings represent the historical profits of a company minus the historical dividends paid. Basically, these earnings didn’t go to the owners. The company retained them.

When a company has surplus money, it can do a couple of things. The first thing is paying dividends. This is the only option where the money goes out of the company and doesn’t come back. Dividends are irreversible.

other comprehensive income
Retained earnings represent all the realized gains of a company after dividend payments.

Now, a company decides if and what dividends they pay. Everything that remains after dividends are retained earnings. Companies can use these earnings to do a couple of things.

  • Invest it in the current business operations to increase production capacity and hire more people.
  • Develop and launch a new product or variant.
  • Invest in a merger, acquisition, or partnership for good business prospects.
  • Buy-back shares from the marketplace.
  • Repay any outstanding loans.

So, in short, retained earnings represent all the realized gains of a company after dividend payments. In the end, the company’s management team decides what to do with them. However, the shareholders might have a say in it as well. They can vote on what to do with the retained earnings. In the end, the shareholders are the real owners of the company.

Conclusion

Net income vs comprehensive income does not represent any battle or dispute. It is simply a differentiation between these two financial instruments. As you can see, there is still quite a bit of a conceptual conundrum in reporting these assets. The international standard is not set in stone. So, companies have quite a lot of possibilities. The main goal is to present your company’s value and prospects in a comparable and understandable way.

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