 Hello, and welcome to the session in which we would look at the statement of comprehensive income. Well, comprehensive income deals with income. So we should be familiar with net income. So what do we mean by comprehensive income? Well, there are certain items that bypass the income statement for now, but they are part of your income ability, your future income ability or your future losses for that matter. Therefore, they are listed as part of comprehensive income or other comprehensive income. What could be some items? Well, it could be available for sale securities, unrealized gain and losses, basically your own stocks, your own bonds, and they go up and they go down in value. But you have not realized them yet. They're unrealized. Foreign currency transactions, we could have pension and retirement plan gains and losses. Those are all items that bypass the income statement. Also, we could have unrealized gains and losses from derivative instruments. So there are many items. The key is to know what is the statement of comprehensive income, what's included there, and what does it look like? That's the most important thing. To illustrate this concept, we're going to look at this company, which is called Adam Corporation. We're going to have a trial balance and we're going to have additional information. So we're going to take this information and prepare a comprehensive income. Well, the comprehensive income, part of it will be net income and part of it will be the other comprehensive income. Bear in mind, we can have two statements. We can have net income and other comprehensive income separately as two statements, or we can combine them together. And this is what we will do in this example. Now, before we look at this example, I would like to remind you whether you are a student or a CPA candidate, most likely that's who you are. To visit my website, farhatlectures.com, I provide you additional resources. The reason you are watching here is because you are looking for some help and you did find me. Go a step further, go to farhatlectures.com where I provide you with additional resources, lectures, multiple choice, through false questions. That's going to help you with your CPA exam or your accounting courses and your accounting courses for that matter. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, connect with me on Instagram, Facebook. So let's start to prepare this statement of comprehensive income. Well, we said the first we're going to look at net income. Well, net income consists of revenues, which we have sales revenues right here, which is a credit 2.3 million. We'll also consist of cost of goods sold 1.4 million. Sales revenue minus cost of goods sold will give us gross profit of 900,000. Now from the gross profit, we are going to be deducting operating expenses, expenses that we need to run the business. Gross profit is an important figure, but that's not really the profit. We need this profit to pay expenses operating the business and after we pay those expenses, what's left is profit. We're going to break our operating expenses into selling and administrative expenses and we can have them separately or we can have them together, selling and administrative. Here we are combining them. Selling expenses are expenses that help us in our selling effort, administrative expenses are expenses that service the whole business, like the HR, the CEO salary, so on and so forth. That's 420,000. Our operating incomes 480,000. And this is really a good measurement of the business health. If you are looking at a business, you want to know how well they are doing from an operating income perspective. Simply put, you want to know, are they making a profit from operating the business? Now, after operating income, we could have other income or expenses and a good example will be interest expense. Interest expense is a form of financing. So we don't put interest expense with operating expenses because different companies finance themselves differently. Some companies use that. They will have a lot of interest expense. Other companies use equity. They will not have interest expense. Nevertheless, I don't care about how they finance themselves. When I'm looking at the company, I want to see how well they are operating the business because they can finance themselves in different ways, depending on interest rate, depending on their credit, so on and so forth. From that, we're going to come up with income before income taxes, which is 440,000. And all what I'm doing is I'm using these figures here from the trial balance. Then also, we're going to have income tax expense. Our income tax expense is 110,000. Again, income tax expense is listed separately. And the reason it's listed separately is because it depends on your tax jurisdiction. So if you're operating in the US, you will have a tax expense then operating in Europe. Or if you're operating in one state in the US, you will have a tax total income tax bill different than another state. And by the way, the annual income tax rate for this company is 25%. So we took 400,000 multiplied by 25% to come up with income tax expense. Now also, after we compute income tax expense, we come up with net income. And this is the income statement that we are familiar with. So if I stop right here, I can change this into income statement. Four year end of December 31, 2021. But we're not going to be finished. Why? Because here's what we do. We have a gain on that securities that's unrealized and classified as other comprehensive income. So this is an item where we have other comprehensive income. Well, guess what? It's this 80,000 here. Gain on that. The Adams income tax rate is 25%. There are 1 million shares outstanding. So we prepared basically the income statement, but that's not what we're preparing. We are preparing statement of comprehensive income. Now, what goes on comprehensive income? One of the items is unrealized gains and losses on that. Well, we have 80,000. That's a great. Now, when we report this other comprehensive income, the 80,000, we have to reported net off tax. And that's important. If we take 80,000 and the tax is 25%, well, if we multiply this by 25%, it's going to give us 20,000 in taxes. Okay, we do have a gain of 80,000. We do have a gain of 80,000. We have to subtract the taxes. What's left is 60,000. Therefore, we would report other comprehensive income net off tax. And that's going to be $60,000 gain on that securities, $60,000. Now also, we can compute this by taking 80,000, the amount times 1 minus 0.25, 1 minus the tax rate, which will give us also 60,000. Simply put, of the 80,000, we are going to keep 75%, 75% is 80,000. So that gain on that securities, notice here it's other comprehensive income. Now we can come up with comprehensive income. So 390, 330 plus 60 equal to comprehensive income of 390,000. So this is what comprehensive income is. And this part here, what made this statement called, statement of comprehensive income rather than net income. Now, again, we can have this statement separately. As I told you earlier, when we have income statement, then statement of comprehensive income separately. Now we are ready to compute EPS, EPS is taken net income divided by the number of shares outstanding, a million shares, which is 33 pennies per share. So in theory, each shareholder will get 33 pennies. And we'll talk about earnings per share later on much, much more in details. What should you do now? Go to Farhat Lectures and work multiple choice questions that's going to help you understand this concept better. Invest in yourself, subscribe, don't shortchange yourself. Comprehensive income is important, farhatlectures.com is the way to go.