Comprehensive income includes both net income and other revenue and expense items that are excluded from the net income calculation.

Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized, including items like an unrealized holding gain or loss from available-for-sale securities and foreign currency translation gains or losses. These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole.

The following table is from the Statement of Stockholders' Equity section of the 3M's 2001 annual report.

This section describes the composition of comprehensive income. It begins with net income and then includes those items affecting stockholders' equity that do not flow through the income statement. For 3M, these items include:

• Cumulative translation adjustment.
• Minimum pension liability adjustment.
• Unrealized gains (losses) on available-for-sale investments.
• Unrealized gains (losses) on derivative investments.

FASB has taken the position that income for a period should be all-inclusive comprehensive income. Comprehensive income may be reported on an income statement or separate statement, but is usually reported on a statement of stockholders' equity.

Practice Question 1

True or False? Comprehensive income includes all revenues, expenses, gains, losses, and prior period adjustments.

Correct Answer: False

Comprehensive income is the change in a company's equity from sources other than owners during a period. It includes net income, changes in unrealized investment gains and losses, and other items affecting equity. Net income includes all revenues, expenses, gains, and losses, except for prior period adjustments.

Practice Question 2

Which statement(s) is (are) true?

I. Comprehensive income includes all changes in equity during a period.
II. Comprehensive income can be reported in the income statement or shareholder's equity.
III. Losses or gains on foreign currency transactions is an example of comprehensive income.
IV. For most firms, comprehensive income is more volatile than net income, exceeding net income in some years but falling below net income in others.
V. Net income is a component of comprehensive income.

Correct Answer: II, III, IV and V

I is false...except those changes resulting from investments by owners and distribution to owners.
II is true. It is reported either at the bottom of the income statement or under the accumulated other comprehensive income section of shareholder's equity.
III is true. This is one of the four components of comprehensive income.
IV is also true.
V is true. Comprehensive income includes net income, changes in unrealized investment gains and losses, and other items affecting equity.

Practice Question 3

Which item is included in comprehensive income but not in net income?

I. Unrealized gains/losses from held-to-maturity securities
II. Unrealized gains/losses from trading securities
III. Unrealized gains/losses from available-for-sale securities

Correct Answer: III only

Practice Question 4

Assume a company's beginning shareholders' equity is $100 million, its net income for the year is $15 million, its cash dividends for the year are $7 million, and there was no issuance or repurchases of common stock. The company's actual ending shareholders' equity is $115 million. What amount has bypassed the net income calculation by being classified as other comprehensive income?

A. $0
B. $7 million
C. $15 million

Correct Answer: B

$115 - (100 + 15 - 7) = $7

Practice Question 5

Which item is included in comprehensive income?

I. Unrealized gains/losses from held-to-maturity securities
II. Unrealized gains/losses from trading securities
III. Unrealized gains/losses from available-for-sale securities

A. I
B. III
C. II and III

Correct Answer: C

II is included in net income so it is also included in comprehensive income, as net income is part of comprehensive income. III is only included in comprehensive income.

Practice Question 6

Assume a company's beginning shareholders' equity is $200 million, its net income for the year is $25 million, its cash dividends for the year are $5 million, and there was no issuance or repurchases of common stock. The company's actual ending shareholders' equity is $220 million. What amount has bypassed the net income calculation by being classified as other comprehensive income?

A. $0
B. $5 million
C. $25 million

Correct Answer: A

$220 - (200 + 25 - 5) = $0

Practice Question 7

A company reported net income of $400,000 for the year. At the end of the year, the company had an unrealized gain of $50,000 on its available-for-sale securities, an unrealized gain of $40,000 on held-to-maturity securities, and an unrealized loss of $100,000 on its portfolio of held-for-trading securities. The company's comprehensive income (in $) for the year is closest to ______.

A. 390,000
B. 420,000
C. 450,000

Correct Answer: C

Comprehensive Income = Net Income + Other Comprehensive Income = NI + OCI

Other Comprehensive Income will include unrealized gains or losses on available-for-sale securities. Net income includes unrealized gains or losses in trading securities, while securities classified as held to maturity are maintained at historical cost and therefore the unrealized gains won't impact comprehensive income.

OCI = $50,000; Comprehensive Income = NI + OCI = $400,000 + $50,000=$450,000