Video: Components of Comprehensive Income

In this lesson, Nick Palazzolo, CPA, breaks down the intricacies of comprehensive income, emphasizing the necessity to differentiate between net income and other comprehensive income (OCI). He meticulously explains why certain items like pension adjustments and foreign currency elements fall into OCI, reinforcing the idea that these do not necessarily reflect the day-to-day performance of a company. Nick elucidates the unique nature of comprehensive income by discussing how non-owner transactions contribute to a more complete picture of a firm's financial health, beyond what the income statement reveals. Furthermore, with a focus on the flow from net income to retained earnings and the role of discontinued operations, this lesson highlights the significance of OCI items as unrealized and non-operational, preparing for a detailed exploration of each component in the following discussions.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Let's talk about the components of comprehensive income, what you'll see on that statement of comprehensive income. Well, there are two main parts. We have net income, which you may know as the income statement, and OCI, other comprehensive income. These are for sure, as I've got this important tag here, memorize, memorize all the way, memorize them, then they are super important. You'll see them throughout the test.

Now, pensions is not really on the test anymore as of recording this video, but you still need to know that pension adjustments belong in OCI. We've got foreign currency items, unrealized gains and losses unavailable for sale, debt securities. The main sort of thought behind all of these items is that this is all the income the company makes. All the income the company makes is on this statement.

Net income is your normal operations. A lot of people want to know how's the company doing, right? They don't really care about other items of inflows and outflows because these are possibly one-time things. These don't really affect the company. So pension adjustments, why are they in OCI other comprehensive income?

Well, because, yes, the company might be making money from the pension plan, they might be having some gains on that pension plan or even losing money. But the thing is that's not really the company's money, that's the money belonging to those employees being paid out in the future. So, yes, there's money coming into the company, but it's not the company's money. So it doesn't really reflect how the company is doing. That's why it's broken out and split out into OCI.

That's why that's like what this is. That's the whole point of this and the purpose of it. Similarly, foreign currency items, well, maybe we

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