Is Other Comprehensive Income Important to Investors?
Original post by Kathy Adams McIntosh of Demand Media
The income statement reports all income items earned by a company. Income items include earnings from the primary operation and non-operating income. The primary operation refers to the main business of the company, such as merchandise sales. Non-operating income refers to money earned from activities outside of the company's primary operation. Other comprehensive income appears in the non-operating income section of this financial statement. Investors review all sections of the income statement, including other comprehensive income.
Other comprehensive income refers to money earned that is not included in the company's main profit and loss reporting. These activities occur outside of normal business activities. They include gains or losses experienced through pension-plan transactions, foreign-currency transactions or changes in the value of available-for-sale securities. Pension plans rise and fall in value based on market conditions and changes in retiree obligations. Foreign-currency transactions experience changes based on exchange-rate fluctuations. Available-for-sale securities experience gains or losses when security values change in the open market.
Comparison with Operating Income
Operating income communicates the earnings from a business that stems from the normal activities of the company. For merchandise companies, this involves purchasing or selling the merchandise. For manufacturing companies, this involves producing and selling finished goods. For service companies, this involves providing work for customers. Operating income omits money earned from activities outside of the normal operations. Investors look at operating income to understand how successful the company operates with its primary activities. Investors look at other comprehensive income to determine whether this income is greater or less than the operating income.
Pension obligations represent future money to be paid to retirees. This obligation changes as the number of employees increases or decreases. Each employee represents a future retiree to whom the company owes a pension. The company invests money each year into a fund that changes value based on the performance of the fund. Investors look at the components of other comprehensive income to determine what future obligations it will owe to retirees.
Foreign-currency transactions generate income when the exchange rates change. Companies that operate in multiple countries experience gains or losses based on the exchange rates. Investors review the components of other comprehensive income to review how well the company manages its foreign-currency transactions.
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About the Author
Kathy Adams McIntosh started writing professionally in 2001. She has been published in "Cup of Comfort," "Community Connection" and "Wisconsin Christian News." Adams McIntosh belongs to the Fearless Freelancers and the Broadway Writers Guild. She earned her Master of Business Administration from the University of Wisconsin.