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What Is The Statement of Comprehensive Income?: Equity

The Statement of Comprehensive Income provides a summary of a company’s net assets over a given period of time by highlighting adjustments to equity. It contains the net income from the income statement and other comprehensive income which includes items excluded from the income statement.

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Katherine Canisguin Alvareco
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42 views

What Is The Statement of Comprehensive Income?: Equity

The Statement of Comprehensive Income provides a summary of a company’s net assets over a given period of time by highlighting adjustments to equity. It contains the net income from the income statement and other comprehensive income which includes items excluded from the income statement.

Uploaded by

Katherine Canisguin Alvareco
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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What is the Statement of Comprehensive Income?

The Statement of Comprehensive Income provides a summary of a company’s net assets 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.

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 but not in the
income statement, which is where 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. This means that the OCI is mainly used to value bigger 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 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 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 accrued expense or receivable income, it could affect the net income
drastically. This means that the statement of comprehensive income does not necessarily 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 of comprehensive income reports the net equity of a business enterprise over a
given period. 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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