Comprehensive income includes net income and which of the following?
A. Treasury stock adjustments
B. Stock repurchase costs
C. Preferred dividends
D. Unrealized gains and losses
Answer (2)
Comprehensive income includes net income along with additional components that reflect changes in equity not due to owner transactions. The correct answer to your question is D: Unrealized gains and losses, which pertain to fluctuations in asset values that have not yet been realized. Understanding these components is crucial for analyzing a company's financial health.
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Comprehensive income is a key concept in financial accounting, particularly when discussing the overall performance of a company.
What is Comprehensive Income?
Comprehensive income is the total change in equity of a company during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners.
Components of Comprehensive Income
Comprehensive income includes two major parts:
Net Income : This is the traditional measure of a company's profitability and is calculated as total revenues minus total expenses (including taxes, interest, etc.).
Other Comprehensive Income (OCI) : Apart from net income, comprehensive income also includes items recognized under other comprehensive income (OCI), which are gains and losses that are not included in net income. These may arise from various financial events and can fluctuate based on market conditions. A common element of OCI is:
Unrealized Gains and Losses : These are gains and losses on certain types of investments (such as available-for-sale securities) that are not realized upon sale or settlement. This means they reflect the change in value but are not yet finalized, as the asset hasn't been sold.
Answer to the Multiple-Choice Question
Given the options:
(A) Treasury stock adjustments
(B) Stock repurchase costs
(C) Preferred dividends
(D) Unrealized gains and losses
The correct answer is (D) Unrealized gains and losses . These are part of "Other Comprehensive Income" (OCI), which, along with net income, forms comprehensive income.
Why Include Unrealized Gains and Losses?
Unrealized gains and losses are included in comprehensive income to provide a fuller picture of a company's financial performance and health. They reflect potential future income or expenses that can impact the value of the company’s equity in the period being reported.
