Big companies have complex business models. It is a tangle of financial information, shareholders, comprehensive income, equity, and so on.
Apart from the business model and accounting, there is also the matter of the organizational structure. Companies have to establish a transparent chain of command. They have to decide on the span of control. Centralizing or decentralizing operations represents a crucial resolution as well.
Leadership is also essential for companies. There are different types of management directions that a company can tackle.
However, first, let’s look at the comprehensive income meaning in business. We’ll address issues such as how to calculate comprehensive income. Moreover, we’ll look into the main comprehensive income items.
So, let’s start.
What is comprehensive income?
Comprehensive income is a holistic overview of a company’s income. It cannot be entirely expressed on the income statement. Why? Because it includes both net income and unrealized income.
The comprehensive income statement incorporates a company’s unrealized gains and losses. They can be indirect gains and losses and are the result of different hedge instruments and derivatives.
What are the financial derivative instruments? Well, they are assets that draw their value from different fluctuating indexes. They can be changes in interest rates or commodity prices. Exchange rates or credit risks are other important fluctuating indexes.
And what about hedge instruments? Hedge instruments are also part of a comprehensive income statement. They are financial derivatives. However, that’s not all. They can influence an entity’s change in fair value or cash flow. So, they could be probable future transactions and investments. In short, hedge instruments are assets, liabilities, or commitments that influence a company’s value.
So, you cannot add all of these to a company’s statement sheet. They’re unrealized gains or losses. However, you can anticipate these changes in the comprehensive income statement.
What about the statement of comprehensive income?
Yeah, so you probably know what a company’s financial statement looks like. However, what is a comprehensive income statement?
A comprehensive income statement is a footnote to a company’s income statement. It can also be included at the bottom of the income statement, with a separate heading.
The footnotes of a financial statement are usually additional pieces of information with clarification items. Investors take a great interest in these financial statement footnotes. They can offer a clearer view of future profitability. And this is what investment is all about, right? Seeing that hidden bright future before anyone else. That’s the goal.
The three main types of financial statements
So, yes, we’re not talking about a mere comprehensive income pdf here. We need to look at the bigger picture. This is how we can understand the full meaning of financial statements and what they convey.
Government agencies are the primary auditors of financial statements. They are the main instruments for ensuring the accuracy of the paid taxes.
So, there are three main types of financial statements.
The balance sheet
Balance sheets include the company’s main assets, liabilities, and equity. It’s like a screenshot of a business’s main dashboard.
Generally, this “screenshot” is taken at the end of each fiscal year. How long is a fiscal year? Well, it’s generally 12 consecutive-month long. Yeah, it’s like a normal calendar year.
Nevertheless, a calendar year will start on January 1st and end on December 31st. A fiscal year can start at any point during a calendar year. It will end after 12 consecutive months. It’s like every company has its own “year”. You got the point, right? Let’s get back to the balance sheet.
So, what are the main financial items from a balance sheet?
First of all, let’s talk about the assets. They can be liquid assets, such as deposit certificates or Treasury bills. This is the “real money” part. Let’s assume, for instance, that customers owe your company money. That money is also an asset. You should put it on the balance sheet, under “account receivable.”
The third most common type of asset is inventory. The inventory contains all the physical items the firm possesses.
Secondly, let’s look at the liabilities. The first form of liability is short-term and long-term debt. This means money will be drained out of the company over a certain period of time. You need to include that.
Moreover, the payable wages are also liabilities. They are money on their way out of the company. Companies actually have a global wage budget, including raises, and they will not go over that.
The third type of liability is dividends. I think everything is clear here.
What about the shareholders’ equity
Ok, so this is a bit more complicated. To calculate the shareholders’ equity, you subtract the total liabilities from the total assets. Let’s assume that all your company’s assets are liquidated. Moreover, all the debt is paid off. Then what’s left is the shareholders’ equity. So, it’s basically what they get if the company is terminated abruptly.
However, there’s more. Shareholders’ equity has got a second component, that’s called retained earnings. Take all the profits your company has ever earned. Subtract the dividends. What you’ve got left are the retained earnings.
So, they’re called “retained” because these profits were retained by the company. They were not paid to the shareholders. Why are they not distributed to the shareholders? This decision is for the company management to make.
So, how is comprehensive income reported on a balance sheet? Well, comprehensive income assets are usually reported in the company’s balance sheet under the shareholders’ Equity section.
Remember that these are unrealized gains and losses. Once they’ve realized this, they should be removed from the company’s balance sheet. Instead, you should add them to the company’s income statement.
So, yeah, this is how to report other comprehensive income. Let’s move on to the income statement. Let us see what it entails.
So, the balance sheet is like a screenshot in time. The income statement is a document that covers a fixed amount of time. Usually, income statements are released quarterly and annually.
The income statement reflects the financial performance of a company. This includes the profit and loss statements:
- Total revenue
- Total expenses
- Net Income
So, it’s not that simple. There are different types of revenue. You need to include the operating revenue. The core business activities of the company generate this one.
Next, you need to include the non-operating revenue. We’re talking about the income earned from activities that are outside of your business activities. Some examples are:
- Interest earned from the cash in the bank
- Income from rent
- Advertising displays placed on the property’s premises
Furthermore, there is the other income, and this one includes earnings from sales of long-term assets or subsidiaries.
Yes, as you might have guessed, there are different types of expenses as well. Primary expenses are easy. They come from the main activities of the business. Examples of primary expenses are:
- Costs of goods sold
- Employee wages
- Sales commissions
- Utilities etc.
Just as with income, there are secondary expenses. They are linked to the secondary income-generating activities of the business. These could be bank loans, debt, commissions, etc. If you sell an asset for a lower price than you’ve bought it, the asset is also considered an expense.
So, as you can see, the income statement provides all the financial details of the company. Investors are also keen on income statements. This way, they can see if sales and revenues are increasing over a specific time. Moreover, the income statement speaks about the company’s ability in managing expenses. Through it, investors can see how well a business succeeds in reducing the cost of its sales. Is it efficient or not?
So, in the end, we subtract the total expenses from the total income. The result is the net income. However, what is the difference between net income and comprehensive income?
Well, the difference is simple. Net income is the actual profit of the company in a single time period. Comprehensive income is the switch in equity from non-owner sources.
So, if revenue is bigger than expenses, you’ve got a net income. Reverse things, and you’ve got a net loss. Both net income and net loss originate from the company’s revenue-making operations. They are calculated over the same period.
The comprehensive income in accounting is equivalent to the total net income and other comprehensive income components.
What are comprehensive income items? We’ve already gone through that, haven’t we? They are volatile assets that represent either an unrealized gain or loss for a company. These are some examples – exchange fluctuations, investment in volatile markets, etc.
Cash flow statement
The CFS shows a company’s ability to generate cash. Cash is super-important for investors. Why? Because a company needs it to pay for its operating expenses, and fund future investments. Debt collectors usually accept only cash.
So, the cash flow statement is just as important as the income statement and the balance sheet.
Investors looking to put their money in a company will first analyze the cash flows in that company. A strong cash flow leads to a solid business foundation.
The Cash Flow Statement has three main components. Let’s look into them.
The operating activities
These are the sources and uses of cash from your normal business operations. They can include wages, tax payments, interests, and rent. More than that, they can represent cash receipts, accounts receivables, etc.
The investing activities
When a company uses its cash for long-term investments, then that’s a cash flow investing activity. This is a complex category that also includes mergers and acquisitions. Furthermore, it incorporates loans made or received.
Any changes in equipment and assets that are directly related to cash fall into this category.
So, how do you include all these in your cash flow statement? Here’s an example!
- Cash generated by operative activities = $323,004
- Negative cash from investing activities = -$32,340
- Negative cash from financing activires = -$3,034
All in all, financial statements are great tools to provide vision into the wealth and liabilities of a business. Nevertheless, they are not bullet-proof statements. They are open to interpretation. This is the investors’ job. They study these statements and decide whether it is a good future investment or not.
Towards a greater understanding of financial statement footnotes
Ok, let’s look a bit closer at what financial statement footnotes are. This will helps us grasp the meaning of comprehensive income as well.
Financial departments use footnotes to make everything easy to understand. These notes are quite long. Imagine if all the footnotes were included in the main financial statement. It would be a pure cloud of intelligible data. Consequently, footnotes have a special role in the whole charade. Financial statements should be as clear as possible. So, the solution stands in the footnotes.
The most common footnotes to a financial statement are:
- The accounting methodology that’s been used for the recording and reporting of the transactions
- Details about pension plans
- Information on the stock option compensations
- The bottom-line return that a shareholder can expect
What is more, if you have a pretty big one-time expense that’s not self-explanatory, then you need to include a footnote. In this footnote, you’ll give the exact details as to why that expense was necessary. These footnotes are explanatory remarks that will help investors get an idea about your company.
The accounting methodology is also important. This methodology dictates how the statement should be interpreted. For example, there are many ways of calculating your company’s earnings per share. So, you need to mention which one you’ve used.
So, yes, you need to explain how you’ve arrived at those values in your financial statements. Various depreciation issues might arise in a specific period. So, you need to mention all of these incidents.
So, we understand how to prepare a comprehensive income statement. However, how is comprehensive income reported?
Comprehensive income in the financial statements
As you have seen, the income statement allows for a clear outline of the main revenues and expenses of a company. These also include taxes and interest.
The main result of the income statement is the net income. However, the net income is only fetched from realized income and expenses. So, at the end of this statement, you should also report the comprehensive income. It affects the net income.
If you know that certain assets of yours have a highly fluctuating value, you should report them here. The comprehensive income is a calculated future impact. This is why it’s essential to report it on the income statement as well.
You report other comprehensive income in the cash flow statement. Here, you can detail the certain comprehensive income assets you have.
What are other ways of recording it?
As you can see, there are a lot of ways of reporting comprehensive income. In fact, companies use different methods.
First of all, you could report the comprehensive income as part of the comprehensive income statement. This is separate from all the other statements. The comprehensive income is simply a stakeholders’ equity. It is not a retained earning.
In the comprehensive income statement, you have two distinct sections. The first one is net income. The other- is comprehensive income. Moreover, in the end, you can make a comprehensive income total.
The comprehensive income total is the sum of the net income and other comprehensive income. Indeed, some companies might want to report them in one statement. Why? Maybe they want to boost their wealth a bit for investors.
Secondly, the comprehensive income is reported in the income statement. We’ve already gone through that. So we won’t waste time explaining it again.
Thirdly, there is no comprehensive income tax calculator. Or you should avoid going into that. In fact, comprehensive income is separated from net income for tax purposes. Its value fluctuates greatly, so you report it as an unrealized return. Otherwise, you’d have to pay taxes for it.
So, why is it so important?
We’ve arrived at probably the main question of this article. How important is comprehensive income?
Comprehensive income gives a whole new dimension and understanding to a company’s assets and wealth.
So, let’s say, for instance, that your company makes a stock investment in another company. You record this transaction in your company’s balance sheet. However, you will record the sum you’ve paid.
So, when the stock prices go up, the amount from the balance sheet will be inaccurate. For this reason, we use the concept of comprehensive income. It will rectify the value of that investment by adjusting it to the current market value.
This is why comprehensive income is important.
Income statements do have drawbacks
This is where other comprehensive income comes into play. An income statement cannot mirror precisely the company’s profitability. Accountants and business leaders know it. The income statement is very much the subject of interpretation. Investors are also aware of this.
Companies would do anything to make their income statements seem bright. Investors would try everything to read through the lines. Why?
Well, companies do have a lot of leeway in how they formulate their financial statements. They can choose the timing and the accounting methodology.
It’s true; revenue is revenue. So, what’s for interpretation there? Well, it’s not like that.
The Financial Accounting Standards Board has come up with another fiscal evaluation called OCI (other comprehensive income).
What is this association? Well, it is an independent and nonprofit establishment that works towards the betterment of accounting and financial reporting. It is based in the United States and follows the GAAP (the generally accepted accounting principles). They work towards improving the transparency, congruity, and uniformity of financial reporting.
OCI or other comprehensive income represents financial items that cannot be included anywhere else in the income sheet. We have already presented the reasons why.
The accumulated other comprehensive income has a very clear role. It should alert investors and other business owners of potential losses or gains.
OCI is usually employed by large corporations. In the past, all the comprehensive income items were deemed volatile. As a result, they were reported as part of the shareholders’ equity. And yes, we’ve explained that practice above. It applies mainly to comprehensive income.
There’s a difference here, and we’d better make it clear.
Comprehensive income vs other comprehensive income
Yes, they’re not the same thing. You could blame the naming for that. They weren’t very imaginative there.
Comprehensive income is simple. It’s the total of the net income and other comprehensive income. It’s basically a universal, comprehensive income. However, it does not explain all the comprehensive income items.
Reporting comprehensive income was regulated in June 1997. The first definition of comprehensive income dates back to that period. It states:
“(…)the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners” – Statement of Financial Accounting Standards No. 130
Other comprehensive income is the one that you will find on the company’s detailed balance sheet under the equity section. In recent years, as you have seen, companies have reported OCI in other ways as well.
They either put OCI at the bottom of their income statement or in the footnotes. Furthermore, other companies have presented it in a stand-alone comprehensive income statement.
OCI has a major impact on a company’s bottom line. Financial analysts should always take a closer look at it.
The main categories of other comprehensive income
There are a couple of other comprehensive income categories that we’d like to go through now. However, first, we should discuss the concept of fair value. It will help us understand the following categories better.
The fair value of a company is a general term in finance. However, it bears several powerful meanings.
First of all, fair value can refer to an asset’s sale price already agreed upon by the parties involved. Secondly, we use “fair value” when talking about the estimated worth of several properties.
In investments, fair value is the balanced price agreed by both the sellers and the buyers. This price sets the marketplace. So, the best way to assess an item’s fair value is to list it on a publicly traded marketplace. One such marketplace is the stock exchange.
Other comprehensive income investment gains and losses
Companies with large investment portfolios deal with lots of unrealized gains and losses. When an investment pays off, then it’s going to be reported on the net income statement. However, what do you do until the gain/loss is in effect? You report it as OCI so that the fair value of your company is not affected.
Other comprehensive income in currency exchange
Firms that operate overseas have to deal in OCIs. Foreign currency adjustments need to be made to assess a company’s true value.
Moreover, analysts need OCIs to determine the impact of currency exchange fluctuations on the company’s financials.
For example, if your company is based in the US, and the dollar is stronger than your overseas currency, then your overseas operations’ value will also be lower.
You cannot ignore the currency variations, and that’s why you need the other comprehensive income data.
Other comprehensive income in pension plans
Corporate retirement plans are also a big part of a company’s OCI. Basically, what a corporate pension plan does is provide income for retired employees. The income depends greatly on the length of that employee’s contract and salary history.
There are a lot of subtleties here as well. For instance, the pension plans can lay below the obligations the company must cover for their current retirees. This might happen because of low-interest rates.
So, for instance, a big manufacturing company can report a net income of $343 million. However, at the same time, they might have a loss of $378 million because of the retirement plan expenses. That’s quite a big blow.
So, retirement plans are big liabilities when it comes to a company’s profit prospects.
Other types of OCI
The other comprehensive income can weigh heavily on a company’s effective profitability. For example, a business can report a whopping $1.5 billion profit on standard income statements. However, they might have a $3.8 billion loss in comprehensive income. When you put these figures in balance, the result is quite pessimistic. An investor would very much question the results of that company.
So, we can conclude here, and now that understanding OCIs can greatly improve a company’s worth. Moreover, financial analysts should rely heavily on the analysis of the OCI in order to make informed decisions.
So, what about the marketing and advertising costs?
The last question on our list is how to report the advertising costs of a company. It is a question that also has a lot to do with financial accounting.
Most brands, products, and entities do have a lot of advertising and marketing costs. These expenses are challenging to report. So, where do you place them?
Advertising costs are sometimes considered simple prepaid expenses. Accountants will report them on the balance sheet. When the sales related to these costs come in, they’ll move them to the income statement. However, it is pretty challenging to know which sales came from what advertising actions.
Your company needs to prove that those advertising costs are directly related to the specific sales. You need a strong reporting tool for this, such as Whatagraph.
Whatagraph – performance monitoring tool for your advertising costs
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Business reporting, financials, and marketing are not separate entities. As a marketer, you should also have in-depth knowledge of financial terms. Also, as a financial specialist, you should know how to report marketing activities and where to include them in the income statement. Or maybe it is about the balance sheet.
We hope this long article on comprehensive income, other comprehensive income, and marketing costs helped you get a clear picture of it all.