Question

What is the difference between net income and comprehensive income? Why is it important that the analyst work with comprehensive income?

Answer 1

Net Income is the income reported in Income statement based on accrual concept. It is calculated after deducting expenses from revenue during the year. It also includes accounting related gains or losses like sale of fixed assets, discount or premium amortization, extra-ordinary loss, etc. Net income is carried over to Balance sheet and added to retained earnings

Comprehensive net income is an extended version of net income. It not only includes net income from income statement but also unrealised income or losses which are not accounted in income statement. Examples includes : Unrealised losses and gains on financial derivative instruments, foreign currency gains or losses, unrealised gains or losses on retirement benefit plans. It provides a broader view compared to Income statement.

Analyst work with comprehensive income since it provides holistic view of company income or loss compared to Income statement which is limited. It is regarded as part of stockholders’ equity. It helps in understanding the profit or loss on few items which are not part of Income statement and may limit the understanding of certain material transactions.