What is the Statement of Comprehensive Income?
Statement of Comprehensive Income refers to the statement which contains the details of the revenue, income, expenses, or loss of the company that is not realized when a company prepares the financial statements of the accounting period and the same is presented after net income on the company’s income statement.
We note from above that Colgate Reported a Net Income of $2,596 million in 2016. however, its total Comprehensive Income, including noncontrolling interests, was $2,344 million in 2016.
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For eg:
Source: Statement of Comprehensive Income (wallstreetmojo.com)
How to Interpret the Statement of Comprehensive Income (with Examples)?
To understand this, we need first to pay heed to the opposite of comprehensive income. The opposite of comprehensive income is narrowed-down income or income from its main operation.
Below is the snapshot of the Consolidated Income Statement of Colgate.
source: Colgate SEC Filings
We note that Colgate’s Net income, including noncontrolling interests is $2,586 million. As we see from above that the Income Statement contains the revenues and expenditures related to the main operations of the businessOperations Of The BusinessBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more.
What about those items (gains/losses) that are excluded from the Income Statement? Where do they get adjusted?
Let us understand this concept with the help of a basic statement of comprehensive income example.
Given below is the balance sheet of Company XYZ.
Total Assets = Total Liabilities = $1300
#1 – Inventory Writedown from $300 to $200
- If the value of the inventory decreases from $300 to $200, then the Total AssetsTotal AssetsTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more amount in the balance sheet will decrease to $1200.
- How does the Total Liabilities figure gets adjusted? Answer: Through the Income Statement -> Retained EarningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more
- The inventory write-downInventory Write-downInventory Write-Down refers to decreasing the value of an inventory due to economic or valuation reasons. When the inventory loses some of its value due to damaged or stolen goods, the management devalues it & reduces the reported value from the Balance Sheet. read more of $100 ($300 – $200) will flow from the Income Statement.
In this example, we have assumed taxes to be zero. The above case is for gains and losses flow through the income statement.
Lets now take a different case where such gains and losses do not flow through the Income Statement.
#2 – If the Marketable Securities (Available for Sale) decreases to $100
- If the value of the Available for Sale Marketable SecuritiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more reduces from $200 to $100, then the Total Assets amount in the balance sheet will decrease to $1200
- However, the Total Liabilities are still at $1300. Accounting rules don’t allow us to adjust this unrealized loss on Available for Sale securities from the Income StatementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more. Instead, they are adjusted directly in the Shareholder’s Equity EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.read more Section through “accumulated other comprehensive income.”
Two takeaways from the above statement of comprehensive income examples –
- Gains and Losses on items that are not allowed to flow from the income statement are included in the Statement of Comprehensive Income.
- Other Comprehensive Income for the period gets added to the Accumulated Other Comprehensive Income in the Shareholder’s Equity Section.
Format for Statement of Comprehensive Income
Comprehensive income connotes the detailed income statement, where we will also include income from other sources along with the income from the main function of the business.
source: Colgate SEC Filings
As seen from the above statement, we have to consider two primary components –
- Net income or loss from the income statement of the company &
- Other Comprehensive Income (net of taxes)
Here’s a simple list of items included in “Statement of Comprehensive Income.”
#1 – Translation Adjustments
Foreign currency translation gains or losses do not flow through the income statement, and therefore, they are included. As we see from below, the cumulative foreign currency translationForeign Currency TranslationThe accounting method in which companies with international businesses translate the financials of their international subsidiaries into their domestic or functional currency in order to meet financial reporting requirements is known as foreign currency translation.read more adjustment for Colgate is – $97 million (pre-tax) and – $125 million (net of taxes)
# 2 – Pension & Other Benefits
Following Pension related gains or losses are included –
- Pension or post-retirement benefit plan gains or losses
- Pension or post-retirement benefit plan prior service costs or credits
- Pension or post-retirement benefit plan transition assets or obligations that are not recognized as a component of the net periodic benefit or cost
We note in Colgate that the Retirement Plan and other retiree benefits adjustments are – $168 million (pre-tax) and – 109 million (post-tax).
#3 – Available for Sale Securities
Available for sale securities are securities that are available for sale (literally!) and have a readily available market price. At the end of each financial year, companies need to value available for sale securitiesAvailable For Sale SecuritiesAvailable for sale Securities are the company's debt or equity securities investments that are expected to be sold in the short run and will are not be held to maturity. These are reported on the balance sheet at fair value, and any unrealized gains or losses on these securities are reported in other comprehensive income as a part of shareholders' equity rather than in the income statement.read more. Any gains/losses due to the change in valuation are not included in the Income Statement but are reflected in the Statement of Comprehensive Income.
Colgate’s Gains (losses) on available for sale securities is – $1 million (post-tax).
#4 – Cash Flow Hedges
Like the list above, unrealized gains and losses from cash flow hedgesCash Flow HedgesA cash flow hedge is an investment method to control and mitigate the sudden changes in cash inflow or outflow to the asset, liability, or the forecasted transactions. It can arise due to interest rate changes, asset price changes, or foreign exchange rates fluctuations.read more flow through the Statement of comprehensive income. Colgate Gains (losses) on cash flow hedges included in other comprehensive income is $7 million (pre-tax) and $5 million (post-tax).
Consolidated Statement of Comprehensive Income format
Here’s a snapshot of how you need to format your consolidated statement of comprehensive income.
| Particulars | Year 1 | Year 2 |
|---|---|---|
| Net Income | ****** | ****** |
| Other Comprehensive Income/Loss: | ||
| Change in Foreign Currency Translation Adjustment | ||
| Available for Sale Investments | ||
| Cash Flow Hedge | ||
| Other Comprehensive Income/Loss (if any) | ||
| Comprehensive Income | ****** | ****** |
Why Report Statement of Comprehensive Income every Quarter?
Now you may ask why it is mandatory for the publicly traded companiesPublicly Traded CompaniesPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market.read more to prepare a consolidated statement of comprehensive every quarter?
Here’s the explanation.
- First of all, these reports are important because they are compared with the last quarter’s report and also with last year’s same quarter so that SEC can understand if any discrepancy lies in the statement or not.
- Second, the ultimate aim of these reports is to help the investors to know better so that they can make more informed decisions about which company they should invest in and which company they should avoid investing in completely.
Things you need to know as an investor
Even after look at the consolidated comprehensive income statement, there are few things you should consider as an investor. Here are they –
- First of all, no single document can tell you the whole thing about a company. To be sure, you need to get your hands on an annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more of the company (to shareholders), the annual report (under 10K), and the consolidated income & comprehensive income statement (under 10Q). Also, checkout SEC Filings TypesSEC Filings TypesSEC filings are formal documents submitted to the Securities and Exchange Commission in the United States that contain financial information about the company as well as any other relevant information about recent or upcoming activities.read more.
- If you appreciate the complexities and technicalities of finance, you will enjoy the detailed approach thoroughly by looking at all of the documents. But, if you are just starting out as an investor, it’s better to learn from someone or hire someone who can help you out with these statements.
- It is recommended that instead of relying only on statements, you should also go for ratio analysisRatio AnalysisRatio analysis is the quantitative interpretation of the company's financial performance. It provides valuable information about the organization's profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements.read more to get a firm grip on how the firm is actually performing. You can start with the cash conversion cycleCash Conversion CycleThe Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation.read more, turnover ratiosTurnover RatiosTurnover Ratios are the efficiency ratios that measure how a business optimally utilizes its assets to generate sales from them. You can determine its formula as per the Turnover type, i.e., Inventory Turnover, Receivables Turnover, Capital Employed Turnover, Working Capital Turnover, Asset Turnover, & Accounts Payable Turnover. read more, DSCRDSCRDebt service coverage (DSCR) is the ratio of net operating income to total debt service that determines whether a company's net income is sufficient to cover its debt obligations. It is used to calculate the loanable amount to a corporation during commercial real estate lending.read more, Interest Coverage RatiosInterest Coverage RatiosThe interest coverage ratio indicates how many times a company's current earnings before interest and taxes can be used to pay interest on its outstanding debt. It can be used to determine a company's liquidity position by evaluating how easily it can pay interest on its outstanding debt.read more, ROIC, ROIC, Return on Invested Capital (ROIC) is a profitability ratio that shows how a company uses its invested capital, such as equity and debt, to generate profit. The reason this ratio is so crucial for investors before making an investment is that it helps them decide which firm to invest in.read moreetc.
In the final analysis
A statement of comprehensive income is the overall income statement that consolidates standard income statement, which gives details about the repetitive operations of the company, and other comprehensive incomeOther Comprehensive IncomeOther comprehensive income refers to income, expenses, revenue, or loss not being realized while preparing the company's financial statements during an accounting period. Thus, it is excluded and shown after the net income.read more, which gives details about the non-operational transactions such as the sale of assets, patents, etc. But don’t depend solely on it. Look for other statements and also to get an inner view of the firm, go through their last 10 years of statements, and try to see a trend coming forward. It will help you in understanding the risk-return ratio even before investing in the organization.
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