Statement of Comprehensive Income Explained

If you're a small business owner, meeting accounting standards is probably the most challenging part of your job. Since most small businesses operate under constrained budgets and fixed resources, proper accounting is vital in providing crucial information to facilitate your business's growth and development.

What does this mean? Whether you are a sole proprietor or have a team of employees, regularly reviewing your financial statements will help you discover operational disparities.

Understanding the statement of comprehensive income is particularly important because it enables small businesses to reflect true income over a particular period. In this article, we'll review and help you understand what a statement of comprehensive income is.

What Is a Statement of Comprehensive Income?

The statement of comprehensive income is a financial statement that highlights your business's net income and other comprehensive income (OCI). The net income is obtained from your business income statement for your accounting period.

In comparison, OCI consists of gains or losses that aren't realized in the income statement. Large corporations with multiple investments in different countries often use this document and a consolidated statement to collectively report on their businesses.

It's important to note that if your business doesn't have items that fit under OCI, the statement of comprehensive income may not be necessary.

Example of Comprehensive Income

Let's say you win the lottery, for example. The prize money is considered part of your income tax expense, but it can't be categorized as regular income.

Comprehensive income refers to the unrealized profits and losses on your business's available investments over a particular period of time. These figures allow you to measure the fair value and not the actual market value of your long-term investments in the business.

Examples of comprehensive income are categorized into gains or losses, including:

  • Derivative financial instruments commonly considered as advanced investing
  • Investments expected to yield returns and retained earnings in the future, such as stocks, bonds, real estate, and gold
  • Debt securities that can be bought or sold prior to maturity
  • Cash flow hedges measured by exposure to the variability of cash flow attributed to a risk associated with an asset or liability
  • Sale securities that can be held for a long time (often considered non-strategic)
  • Pension, post-retirement, and benefit plans that are mostly considered an investment by companies

Gains or losses may also be accrued from foreign currency translation adjustments, as shown in the table below.

Net earnings 137,116
Other comprehensive (loss) income:
Net unrealized (loss) gain on derivative instruments, net of tax 5,793
Pension funded status adjustment, net of tax 2,003
Foreign currency translation adjustment 64,721
Total other comprehensive (loss) gain, net of tax 72,517
Total comprehensive income 64,599
Comprehensive (loss) gain attributable to noncontrolling interests 193
Comprehensive income attributable to stockholders 64,792

Comprehensive income doesn't include changes caused by owners and nonowners in equity, such as purchasing treasury shares or the sale of stock. One thing you'll note is that these elements rarely occur in small or midsize business enterprises. They are more robust in large corporations.

What Should Be Included in a Statement of Comprehensive Income?

Even though you may not be concerned with the statement of comprehensive income as a small business owner, it's good to be familiar with what goes into this monthly financial report or in the annual report. Who knows when you'll be seeking new investors or expanding to multiple countries.

The statement of comprehensive income can be one document or several depending on your business structure. It includes two main sections: net or unrealized income and other comprehensive income. Take a look at the example below.

Sales 500,000
Cost of goods sold 100,000
Gross profit 400,000
Operating expenses
Salaries 50,000
Rent 24,000
Other operating expenses 74,000 326,000
Income from continuing operations before taxes 74,000
Income taxes 15,000
Net income/earnings 59,000
Other comprehensive income adjustments from certain investments 10,000
Comprehensive income 69,000

The example above is a more elaborate statement of comprehensive income illustration showing how the income statement and the comprehensive income are calculated. The income statement is an essential part of the statement of comprehensive income.

At the bottom, you can see the net income/earnings are added to accumulated other comprehensive income adjustments to get the comprehensive income.

Net Income and Unrealized Income

Net income only accounts for the earned revenue and expenses. When your business accrues gains or losses from the fluctuations in value of its assets, it's not recognized in the net income. This is called unrealized income.

Examples of unrealized income are adjustments from a foreign currency transaction, gains from a retirement program or pension plan, or gains from derivative instruments.

Net income and unrealized income are essential in conducting a complete financial analysis. Unrealized income is not taxable until it's realized. It's included to show the current value of an investment.

Other Comprehensive Income or Losses

Other comprehensive income or losses are vital metrics used in the evaluation of your business and profitability. It's crucial to note that only unrealized items qualify to be recorded under other comprehensive income or loss.

Even though the income statement is the primary indicator of profitability, other comprehensive income or losses increase the transparency and reliability of financial reporting.

For example, a financial analyst can use it to obtain insight on your business investments (unrealized gains or losses) that forecast your actual realized gains or losses. It also helps determine the impact of future liabilities on unrealized profits. Think of it as getting an insight into your unrealized income.

For What Is a Statement of Comprehensive Income Used?

As mentioned, the statement of comprehensive income is a combination of the income statement and the OCI. This financial document brings business events to light and can be used for numerous purposes, which we will review further in this section.

Provide Information on Company Revenue

The primary purpose of an income statement is to give detailed information on how your business makes revenue and the costs incurred in the process.

The comprehensive income statement thoroughly highlights these details. It explains everything from the cost of goods sold (which translates to the cost of operating activities) to other unrelated incurred costs, such as taxes.

It also highlights other sources of revenues not associated with the main operation of your business. These elements are essential in determining the accrued investments of your business, even to small business owners.

Investor Analysis

As a small business owner, having a statement of comprehensive income is crucial if you're interested in bringing investors on board in the near future. The statement of comprehensive income is among the financial reports an investor is interested in reviewing before investing in a business.

The statement can show the earning per share and how the net profits are distributed according to the outstanding shares. If the earnings per share are high, the higher the chances of investors investing in your business.

Take note of the balance sheet (i.e., the statement of financial position), which is directly related to the statement of changes. It plays a key role in investor analysis and gauging financial performance. It tells investors how much a company has through the net assets, how much it owes in the liability column, and what is left after the two are net.

Investors can measure a company's strength by evaluating three broad categories that must be included in the balance sheet: working capital (short-term liquidity), capitalization structure, and asset performance.

The balance sheet can also be used to derive shareholder's equity, which is majorly broken down into three categories: common shares, preferred shares, and retained earnings.

Predict Future Performance

Keeping track of your revenue, expenses, and income is crucial. It helps you predict the future performance of your business. That's why Skynova has 37 online software modules designed for small businesses to simplify work for you.

The statement of comprehensive income provides an overview of your revenue and expenses, and income in general, as well as a basic overview of future undertakings. By offering predictive value, you can plan, strategize your business, and prepare for the future.

Let Skynova Help You With Your Small Business's Financial Statements

Keeping track of your financial statements and reports is crucial for small business owners. If you want to scale and grow your business, you have to pay attention to these statements.

We understand how tiring and draining compiling reports can be, especially if you have no experience. Channel your energy into running your business by using Skynova's accounting software to compile your financial reports. As we've seen earlier, the statement of comprehensive income is essential in running your business smoothly, monitoring your future investments, and positioning your business at a higher level to attract investors.

Get more time to focus on your business by taking advantage of our software products and business templates.

Notice to the Reader

The content within this article is meant to be used as general guidelines for creating and understanding the role of a statement of comprehensive income. It may not apply to your specific situation or the nature of your business. Always consult with a professional accountant to ensure you're meeting accounting standards.