Week 4 Discussion

1
"Comprehensive Income and the Income Statement" Please respond to the
following:
From the e-Activity, create one (1) argument to support the use of a two-step
approach over the single-step approach when reporting comprehensive income. Support
your response with specific examples that illustrate why the two-step approach is more
beneficial than the single-step approach.
Differentiate between a multi-step income statement and a comprehensive income
statement, and suggest which income statement is more useful to investors and creditors.
Provide a rationale for your suggestion.

The two-step approach makes the financial statement more understandable by dividing
the comprehensive income (operating section) into an income statement and other
comprehensive incomes. When both are combined as in a single-step comprehensive income, it
is difficult to understand the effects of the other comprehensive income on the general financial
performance. Hence, the two-step approach is more beneficial than the single-step approach
when reporting comprehensive income. With this approach, the income statement retains its
status as a primary financial statement. For example, when you report comprehensive income in
a separate statement, you automatically show that the gains and losses identified in the statement
as other comprehensive income have a similar status as the traditional gains and losses.

A comprehensive income statement shows the sum of net income and other items which
must bypass the statement of income because they have not yet been realized. These other items
include items such as unrealized gains or loss from available for sale securities and gains or
losses from foreign currency translation.

A multi-step income statement proceeds with a series of steps until income from operating
activities is found. This is to mean that other vital revenue and expense classifications are made.
These further classifications include:

Separation of operating and non-operating activities of the company. For instance, a firm
usually presents income from operations followed by sections titled other revenues and
 gains and other expenses and losses.

Classification of expenses by functions, for example, cost of goods sold, selling, and
administration

The multi-step is an improvement of the single-step income statement, and it distinguishes

operating revenues and expenses from non-operating gains, losses, and expenses. It has multiple
subtractions. The comprehensive income statement does not differentiate the operating revenues
and expenses from the non-operating gains or losses and may include even foreign exchange
gains and losses which do not reflect business performance. Creditors need to be sure that the
money they have to lend to the business will be repaid while investors need to be assured of
favorable rates of return on their investment. They will, therefore, rely more on the multi-step
income statement which matches operating revenues with their expenses making it easy to
calculate gross margins and other important ratios used in investing and lending decision
making.

A multi-step income statement is more useful to investors and creditors. This is because the
additional sub-classifications found in a multi-step income statement are more informative and
useful to creditors and investors. For example, the reporting of gross profit avails investors and
creditors with a useful number for evaluating the performance of a firm and predicting its future
earnings. Investors and creditors may also study the trend in the gross profits of the firm to
determine how efficiently the firm uses its resources.
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