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 is a financial statement that summarizes both standard net income and other comprehensive income (OCI). The net income is the result obtained by preparing an income statement. Whereas, other comprehensive income consists of all unrealized gains and losses on assets that are not reflected in the income statement.  It is a more robust document that often is used by large corporations with investments in multiple countries.

 

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 summarizes all the sources of revenue and expenses, including taxes and interest charges.

Unfortunately, net income only accounts for the earned income and incurred expenses. There are times when companies have accrued gains or losses resulting from the fluctuations in the value of their assets, that are not recognized in net income. Some examples of these unrealized gains or losses are:

  • 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 rarely occur in small and medium-sized businesses. OCI items occur more frequently in larger corporations that encounter such financial events.

That said, the statement of 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 unrealized balance sheet gains or losses that are 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 main operations of a company. This entails items such as the accrued interest from business investments.

 

2. Analysis tool for investors

The SCI, as well as the income statement, are financial reports that investors are interested in evaluating before they 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 – expenses that the company is yet to pay. But if there’s a large unrealized gain or loss embedded in the assets or liabilities of a company, it could affect the future viability of the company drastically. Therefore, an income statement on its own can be misleading.

 

2. Difficulties in making predictions

Another area where the income statement falls short is the fact that it cannot predict a firm’s future success. The income statement will show year over year operational trends, however, it will not indicate the potential or the timing of when large OCI items will be recognized in the income statement.

 

Final Word

The statement of comprehensive income reports the change in net equity of a business enterprise over a given period. The statement of retained earnings includes two key parts: 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:

 

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