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Comprehensive Income



Definition

Comprehensive income is a statement of all income recognized by a business, both operational and non-operational, during a specified period. It includes net income, often reported as the bottom line, as well as other forms of income that are not included in net income, such as unrealized gains or losses on investments, foreign currency adjustments, and changes in accounting principles. It gives a holistic view of a company’s total financial performance.

Phonetic

The phonetics of the keyword “Comprehensive Income” is: /kɒmprɪˈhɛnsɪv ˈɪnkʌm/

Key Takeaways

<ol><li>Comprehensive Income: It is a statement of all income and expenses recognized during a specified period. This includes items not normally included in the net income, such as unrealized gains or losses on investments, foreign currency translations, pensions, and asset impairments.</li><li>Importance: Understanding comprehensive income allows investors to get a greater depth of understanding of how a business is doing. They can see if the company is gaining value or making financial improvements not reflected in the net income.</li><li>Financial Reporting: In financial statements, comprehensive income can be presented either in a single statement of comprehensive income or in two separate income statements. However, all items of income, expense, gains and losses recognized in a period must be included in comprehensive income, regardless of whether they are recognized in profit or loss, in other comprehensive income, or directly in equity. </li></ol>

Importance

Comprehensive income is an important term in business and finance as it provides a holistic view of a company’s overall financial performance. It includes all revenues, gains, expenses and losses incurred during a specific period, going beyond the standard net income figures to also account for items that are not realized through normal business operations. These could be items like foreign currency translations, unrealized gains or losses on certain types of investments, or changes in the fair value of certain liabilities, among others. By providing a broader perspective of a firm’s total economic performance, comprehensive income helps investors, analysts and business owners to make more accurate financial decisions and assessments.

Explanation

Comprehensive income serves to provide a wider and holistic perspective of a company’s financial performance over a certain period. While net income sifts out only the revenues and expenses, comprehensive income takes into account all forms of income, losses, gains, or costs that a company goes through, whether part of regular business operations or not. It includes revenues, profits, expenses, and losses under different heads such as foreign currency translation gains/losses, unrealized gains/losses, and changes in the market value of certain types of marketable securities. The purpose of comprehensive income is to illustrate the complete financial picture of a company beyond the conventional income statements. From an investor’s viewpoint, it provides a detailed report on all the company’s activities that have affected shareholders’ equity, other than transactions such as issuance or repurchase of shares, dividends, etc. The concept of comprehensive income allows users of financial statements to analyze changes in equity of a business that are not related to interactions with owners. Therefore, it advances the understanding of the overall financial health of a business, thus aiding in making informed financial decisions and forecasts.

Examples

Comprehensive Income in business/finance is a measure of all revenue, costs, gains, and losses that change a company’s shareholders’ equity throughout a specific period. It includes all revenues and costs reported on the income statement, plus other items such as unrealized gains or losses on investments, foreign currency exchange rate changes, etc.Here are three real world examples:1. **Microsoft Corporation (2019)** – In their 2019 fiscal year, Microsoft reported a net income of $39.24 billion. However, they also reported a comprehensive income of $43.56 billion. The difference was largely due to unrealized gains on derivatives, foreign currency items, and available-for-sale securities.2. **PepsiCo Inc. (2020)** – For the fiscal year ending Dec 31, 2020, PepsiCo reported a net income of $7.12 billion. However, their comprehensive income for the same period was $6.98 billion due to currency translation adjustments and changes in the fair value of certain investments.3. **Amazon Inc. (2018)** – In 2018, Amazon reported a net income of $10.07 billion, but their comprehensive income was $11.06 billion. The higher comprehensive income was due to several factors, including unrealized gains on available-for-sale securities and foreign currency translation adjustments.Each of these scenarios shows how comprehensive income gives a broader picture of a company’s financial performance beyond just their net profit or loss.

Frequently Asked Questions(FAQ)

What is Comprehensive Income?

Comprehensive income is a measure of a company’s total earnings and other comprehensive income, including all changes in equity other than those resulting from investments by shareholders and distributions to shareholders.

How is Comprehensive Income calculated?

Comprehensive income is calculated by adding net income (the sum total of all revenues, costs, and expenses) and other comprehensive income (such as unrealized gains/losses, foreign currency translations, and changes in the market value of investments).

What is the role of Comprehensive Income in financial reporting?

The role of comprehensive income in financial reporting is to provide a clear picture of the overall financial performance of a company. It offers an enlarged perspective of financial outcome that net income alone does not provide.

Why is Comprehensive Income important?

Comprehensive income is important because it tells a broader view of a company’s financial position. It accounts for all income, expenses, gains, and losses that directly affect shareholders’ equity, even if they aren’t realized through transactions.

Where can I find a company’s Comprehensive Income?

Comprehensive income is often reported in the company’s financial statements, usually in the shareholders’ equity section.

What’s the difference between Net Income and Comprehensive Income?

Net income relates to revenues and expenses from the company’s primary operations, while comprehensive income includes the net income and other comprehensive income (like unrealized gains and losses on certain types of investments).

Can Comprehensive Income be negative?

Yes, comprehensive income can be negative. If a company’s expenses, losses, and other costs exceed its revenues and gains during a certain period, the comprehensive income will be negative, indicating a net loss.

Are companies required to report Comprehensive Income?

Yes. According to the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), companies are required to report comprehensive income in their financial statements.

What does a high Comprehensive Income indicate?

A high comprehensive income can indicate that a company is in a sound financial position and performing well both in its primary operations and in other areas such as investments.

: How does Comprehensive Income affect the balance sheet?

Comprehensive income directly affects the equity portion of the balance sheet because it includes all changes in equity for a particular period, except for those resulting from transactions with shareholders.

Related Finance Terms

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