 Hello and welcome to this session in which you would look at an example that illustrates the concept of comprehensive income. What is comprehensive income? Well, comprehensive income is any item that bypasses the income statement but it affects your equity. So basically what affects your equity? Well, what affects your equity are revenues, expenses, gains, losses, investment by owners, withdrawals, dividend, those are the transactions that affect your equity. So there are certain transactions that affect your equity but they don't affect your income statement. What are those some potential comprehensive income items? Well, cash flow hedges, unrealized gain or losses and losses on available for sale securities, foreign currency translation adjustments. So what happened is this, these transactions, they don't affect your income statement but they affect your equity. They bypass your income statement but they affect your equity. So therefore we report them as part of comprehensive income. Now comprehensive income can be reported separately. In other words, it could have its own comprehensive income statement or it can be part of the income statement. In this session I will show you how comprehensive income is reported as part of the income statement although in the real world it can be shown as a separate statement. Comprehensive income could be a separate statement then comprehensive income will go to other comprehensive income on the balance sheet and will end up on the balance sheet but it has its own income statement. Now this topic is extremely important, comprehensive income, whether you are an accounting student or a CPA candidate and this illustration, basically I'm showing you an illustration, this could be a quasi CPA simulation, you could see it on in a form of a multiple choice questions. So whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course, that's not my intent, nor I replace your accounting course. My motto is saving accounting students and CPA candidate one at a time. How? By providing resources for their accounting courses, managerial accounting, intermediate, governmental cost audit and providing new resources for your CPA preparation. My CPA resources are aligned with your Becker, Roger, Glean and Wiley so it's very easy to go back and forth between my material and your CPA review course. It's also beneficial to you because I give you access to 1500 previously released AICPA questions in addition to thousands of practice multiple choice questions. If you have not connected with me only then please do so. Take a look at my LinkedIn recommendation, like this recording, it helps, it helps me tremendously. Connect with me on Instagram and Facebook. Let's take a look at this example to illustrate the concept of comprehensive income. So we have the Trial Balance of Aram Corporation, a manufacturing company for the year and the December 31st X1 or 2021. So we have revenues, cost of goods sold, selling at an administrative interest and gain on that securities. And the gain is unrealized gain on that securities. The gain on the debt securities is unrealized gain and classified as other comprehensive income. Now on the exam they may not give you this piece of information, you need to know that unrealized gain, once they tell you it's unrealized gain, well it's part of comprehensive income. The Trial Balance does not include the accrual for income taxes. So we have to accrue the taxes. Income taxes happens to be 25% and we have 1 million shares of common stock outstanding and so they're asking us to prepare a single continuous multiple step income statement of comprehensive income for 2021, including the appropriate earnings per share. So here they're asking us to complete the income statement which would include the well basically the comprehensive income which is part of the income statement. Well let's start with the heading. First it's the name of the company statement of comprehensive income year and the December 31st. Now just if you are a subscriber to Farhat Lectures you can remove those white blackout to see the whole thing if you would like to print it. How do we start an income statement? Well hopefully we know this, we start by revenues. We have revenues of 2.3 million minus cost of goods sold 1.4 million. That's going to give us gross profit of 900,000. From gross profit we are going to deduct operating expenses which will include selling and administrative they're combined together you might see them separately. Selling is any expenses that helps in the selling process. For example advertising expenses, shipping expenses, salaries paid for sales people, sales commission. Administrative expenses are expenses that service the whole company like HR, payroll, the CEO salaries, the CFO salaries, those are administrative expenses. Here they combine them they happen to be 420,000. Well what's going to happen? Gross profit minus operating expenses minus selling and administrative expenses which has operating expenses it's going to give us operating income. And in the real world operating income is a very important figure so when you're evaluating a company's performance your main concern is is this company making a profit from operating the business and it seems this company is making a profit. Then from operating income you will deduct other expenses and income which whatever they are other expenses and income we could have for example here interest expense of 40,000. So notice interest expense is separate than selling and separate than cost of goods sold because it has nothing to do with operating the business. Interest expense has to do with financing the business. For example you could have two businesses one relying on debt which will have interest expense and the other business is relying on equity which they don't have interest expense they have to pay the shareholders dividend. Well bear in mind those two companies are comparable except don't include interest expenses as part of operating expenses so compare their operating income rather than some other figures which we'll see. So interest expense is listed separately. After we deduct interest expenses we come up to earning before income and taxes in the real world this is called EBIT earnings before interest and taxes EBIT before taxes now we're going to pay taxes we're going to pay taxes and we assume the tax rate is 25 percent that's going to give us a tax bill of 110,000 now we come up with net income of 330,000. Now this is the this is the basically the income statement. Now why do we call this statement statement of comprehensive income is because we are including the items that affect equity as part of this statement so what is the item that affect equity that bypass income statement and that's the gain on that securities that are classified as available for sale which is part of comprehensive income now what we do is we have other comprehensive income and it's reported net of tax OCI is reported net of tax now we have other comprehensive income of 80,000 well what's going to happen is we're going to have to multiply it one minus the tax rate and what's going to end up with is 60,000 so other comprehensive income is reported net of tax net of tax means you report the number after you consider the tax consequences so if we have an unrealized gain of 80,000 we have to pay taxes of 25 percent so 80,000 times 0.25 that's going to give us 20,000 of a tax bill therefore our net of tax profit 80 minus 20 well which will give us 60,000 therefore gain on the debt securities net of tax is 60,000 now we could come up with comprehensive income of 390,000 we have one million shares outstanding 330,000 divided by one million shares that's going to give us earnings per share of 33 pennies now the best way to learn more about comprehensive income and other topics is to go to farhatlectures.com once again whether you are an accounting student or a CPA candidate my material will help you understand your CPA content better I don't replace your CPA review course I don't replace your accounting course I'm only going to be a supplemental material invest in yourself invest in your career my subscription is nominal try give me a chance for a month you see it's helping you you keep it it's not helping you you cancel I have helped thousands of students your accounting career is worth it the CPA exam is worth it good luck study hard and of course stay safe