Income statements are very important parts of any company’s financial statements. It is a summary of a company’s revenues and expenses over a particular period, usually one fiscal year. The statement of comprehensive income is also a part of the income statement, but it includes both standard net income and other comprehensive income (OCI).
Understanding how to read and analyze an income statement is critical for any investor or financial analyst. Since this statement is related to a company’s bottom line, it can give investors as well as owners valuable insights into a company’s overall performance and health.
Definition of Statement of Comprehensive Income
First, let’s take a look at what comprehensive income is. According to the Financial Accounting Standards Board (FASB), comprehensive income is “the change in equity of a company during a period from transactions and other events and circumstances from nonowner sources.” This includes both net income and OCI.
OCI is made up of items that affect equity but are not included in net income. These items can either be positive or negative. Some examples of items that would be included in OCI are unrealized gains or losses on investments, foreign currency translation adjustments, and pension plan adjustments.
The statement of comprehensive income is sometimes also referred to as the “statement of changes in equity.”
Importance of the Statement of Comprehensive Income
The statement of comprehensive income is important because it gives investors and analysts a more complete picture of a company’s financial health. Net income is just one part of the equation; OCI can also have a significant impact on a company’s equity. There are two main ways to measure a company’s equity: the balance sheet and the statement of comprehensive income.
The balance sheet is a snapshot of a company’s equity at a particular point in time. The statement of comprehensive income, on the other hand, shows the changes in equity over some time. This is why the statement of comprehensive income is often considered to be a more accurate measure of a company’s equity.
In addition, the statement of comprehensive income can give insights into a company’s long-term prospects. For example, if a company has been reporting negative OCI for several years, it may be indicative of underlying problems that could impact the company’s equity in the future.
How comprehensive income is calculated?
It’s easy to calculate a company’s comprehensive income; all you need is the company’s net income and OCI for the period in question.
Comprehensive income = Net income + OCI
Net income: Net income is the bottom line on the income statement. It is calculated by subtracting a company’s expenses from its revenues.
OCI: OCI or other comprehensive income is a catch-all category for items that affect a company’s equity but not its net income. These items can be either gains or losses. Some examples of items that would go into OCI are foreign currency translation adjustments, unrealized gains or losses on investments, and pension plan re-measurements.
Most investors and financial analysts prefer to use the statement of comprehensive income when analyzing a company’s financial statements. This is because the statement gives a more complete picture of a company’s equity, including items that are not included in net income. The statement of comprehensive income is also useful for identifying trends that could impact a company’s equity in the future.
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