Final answer:
Comprehensive income excludes changes in equity from shareholder transactions such as issuing new shares, share repurchases, and dividend payments. It includes net income and items in other comprehensive income like unrealized gains and losses on certain types of securities.
Step-by-step explanation:
Comprehensive income is a broadly defined measure of profitability that includes both net income and other comprehensive income (OCI) items that are not included in the net income calculation. According to financial reporting standards, comprehensive income for a period excludes changes in equity resulting from shareholder transactions, such as issuing new shares, share repurchases, and the payment of dividends.
Other comprehensive income includes items like unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments, and adjustments for pension obligations. By excluding changes in equity that are a result of direct transactions with shareholders, comprehensive income focuses solely on income that is earned by the company's operations and other relevant activities during the reporting period.
For example, if a company's equity increases because it issued new shares of stock to investors, that change is not part of comprehensive income. Similarly, if a company pays dividends to its shareholders, the reduction in equity would also not be part of comprehensive income. These transactions are directly related to shareholder interactions and are considered financing activities rather than income generated through the company's performance.