The FASB's concept of comprehensive income

Question

Quizplus · Accepted Answer

The Financial Accounting Standards Board (FASB) introduced the concept of comprehensive income to provide a more inclusive view of a company's financial performance than net income alone. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Here's a breakdown of the options provided:
a. This statement is partially correct. Comprehensive income does include items that are not necessarily under management's control, such as currency translation adjustments. However, these items are not shown as an appropriation of retained earnings. Instead, they are included in other comprehensive income (OCI), which is a component of comprehensive income and is presented in the equity section of the balance sheet, separate from retained earnings.
b. This statement is incorrect. The primary benefit of comprehensive income is that it provides a more complete picture of a company's financial performance by including certain gains and losses that are excluded from net income. While there may be some flexibility in how certain items are reported, the FASB has established guidelines to limit management's discretion in determining what is included in comprehensive income.
c. This statement is correct. Comprehensive income excludes transactions that involve the payment of dividends and other transactions affecting owners' equity, such as the issuance of stock or stock buybacks. These are considered financing activities and are not included in the calculation of comprehensive income.
d. This statement is incorrect. Not all transactions representing changes in asset and liability accounts must be shown on the income statement. Comprehensive income includes certain gains and losses that bypass the income statement and are reported directly in equity as OCI. Examples include unrealized gains and losses on available-for-sale securities and pension plan adjustments.
Therefore, the most accurate description of the FASB's concept of comprehensive income is:
c. excludes transactions that involve the payment of dividends and other transactions affecting owners.

The FASB's Concept of Comprehensive Income