Explain ‘comprehensive income’.

Comprehensive income is best understood as a measure of changes in equity during a period, which encompasses not only the net income that a company earns but also other comprehensive income items that are not reflected in the net income. This total includes revenues, expenses, gains, and losses that are recognized in the period but excluded from net income under accounting standards.

The reason this measure is comprehensive is that it provides a fuller picture of a company’s financial performance by including elements such as unrealized gains and losses on certain securities, foreign currency translation adjustments, and pension liability adjustments. By capturing these components, comprehensive income offers a more complete view of how a company’s equity has changed over time, which is critical for stakeholders analyzing the overall financial health of the organization.

The other choices do not fully encapsulate the concept of comprehensive income. For instance, focusing only on cash flows from operating activities ignores other crucial elements that affect equity. Similarly, a report that only reflects net income fails to account for the broader changes in equity that come from comprehensive income. Calculating tax liabilities, while important, does not contribute directly to the understanding of comprehensive income as it pertains specifically to periods of financial performance.