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Statement of Comprehensive Income

A summary of a company’s net assets over a given period of time

What is the Statement of Comprehensive Income?

The Statement of Comprehensive Income provides a summary of a company’s net assets (those obtained from sources other those of the business owner) over a given period of time. In other words, the statement highlights the adjustments on equity during a given timeframe.

A statement of comprehensive income contains two main things: the net income and other comprehensive income (OCI). The net income is the result obtained by preparing an income statement. On the other hand, OCI consists of all the other items that are excluded from the income statement.

 

Statement of Comprehensive Income

Source

 

Breaking down Comprehensive Income

One of the most important components of the statement of comprehensive income is the income statement. It is used to provide a summary of all the sources of revenue and expenses, including payable taxes and interest charges. Ideally, the aim of preparing an income statement is to find a company’s net income.

Unfortunately, net income only accounts for the earned income and incurred expenses. There are times when companies make gains or losses resulting from the fluctuations in the value of their assets. The outcome of such events is recognized in the cash flow statement and not in the income statement, which is where the ‘other comprehensive income’ comes in. Any transactions not captured in the income statement are accounted for in the OCI report. It entails items such as:

  • Gains or losses from pension and other retirement programs
  • Adjustments made to foreign currency transactions
  • Gains or losses from derivative instruments
  • Unrealized gains or losses from debt securities
  • Unrealized gains or losses from available-for-sale securities

 

One thing to note is that these items occur very rarely when it comes to small and medium-sized businesses. It means that the OCI is mainly used to value bigger corporations that encounter such financial events.

That said, the comprehensive income is computed by adding the net income – which is found by summing up the recognized revenues minus the recognized expenses to other comprehensive income, which captures any other items excluded from the income statement.

 

Uses of a Statement of Comprehensive Income

As explained earlier, the statement of comprehensive income encompasses the income statement and other comprehensive income. Preparing the income statement sheds light on a company’s financial events. Here are some of the uses of an income statement:

 

1. Detailed revenue information

The primary purpose of an income statement is to provide information on how a company is raising its revenue and the costs incurred in doing so. The income statement is very thorough in highlighting these details. Not only does it explain the cost of goods sold, which relate to the operating activities but it also includes other unrelated costs such as taxes. Similarly, the income statement captures other sources of revenue, which are not associated with the managing operations. It entails items such as the accrued interest from business investments.

 

2. Analysis tool for investors

The SCI, as well as the income statement, is a financial report that investors are interested in evaluating before they can decide to invest in a company. The statements show the earnings per share or the net profit and how it’s distributed across the outstanding shares. The higher the earnings for each share, the more profitable it is to invest in that business.

 

Limitations of a Statement of Comprehensive Income

 

1. Misrepresentation

Although the income statement is a go-to document for assessing the financial health of a company, it falls short in a few aspects. The income statement encompasses both the current revenues resulting from sales and the accounts receivables, which the firm is yet to be paid. Similarly, it highlights both the present and accrued expenses or rather the expenses that the company is yet to pay. But if there’s a large accrued expense or receivable income, it could affect the net income drastically. It means that the statement of comprehensive income does not depict the true status of a business.

 

2. Difficulties in making predictions

Another area where the income statement falls short is the fact that it does not give a lot of information regarding a firm’s future success. The income statement is great for establishing the earnings per share and other past financial records. However, it does not reveal the future trends that the different items will take, be it sales or expenses. It also fails to explain the exact sources of income of the company. A firm could be experiencing an increase in sales by underpaying its workers and overcharging consumers.

 

Final Word

The statement if comprehensive income reports the net equity of a business enterprise over a given period. The transactions captured in the report are those that result from non-owner activities. The financial statement includes two key parts: the income statement, which outlines the net income, and other comprehensive income, which incorporates the items excluded from the income statement.

 

Related Readings

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Analysis of Financial Statements
  • Projecting Income Statement Line Items
  • Reading Financial Statements Course
  • Accounting Fundamentals Course

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