Question

6. What is the relationship between accumulated other comprehensive income (AOCT) and other comprehensive income? Hint: calculate the difference between beginning and ending AOCI. (1/2 pt) 7. In what way is AOCI similar retained earnings, besides the fact that they are both equity accounts? (1/2 pt) 367 MacBook Air

Answer 1

1. Relationship between OCI and AOCI

• Accumulated other comprehensive income (AOCI) accumulates other comprehensive income (OCI), which records unrealized and realized gains and losses from certain transactions. Unrealized means paper gains and losses, which are usually not part of the net income calculation for a small business.
• Accumulated other comprehensive income is part of the shareholders' equity section of the balance sheet, while other comprehensive income and net income are part of the income statement.
• Other comprehensive income items include unrealized gains and losses from currency translations, changes in the market value of investment securities, and unrealized gains and losses in derivative instruments. Small businesses may report these items net of taxes.
• For example, if a company's currency translation gains are $10,000 and the tax rate is 15 percent, the net currency translation gains are $8,500 [$10,000 multiplied by (1 minus 0.15)]. If the company incurs $5,000 in after-tax unrealized losses on investment securities, the other comprehensive income is $3,500 ($8,500 minus $5,000).
• Accumulated other comprehensive income is usually shown below retained earnings -- which accumulates net income -- in the shareholders' equity section of the balance sheet.
• The beginning balance in accumulated other comprehensive income plus the other comprehensive income recorded during the period equals the ending accumulated other comprehensive income.
• Continuing with the example, if the accumulated other comprehensive income balance at the beginning of the year is $20,000, the ending balance for the year is $23,500 ($20,000 plus $3,500). If the other comprehensive income is a negative amount, meaning that it is actually a loss, then the ending balance in accumulated other comprehensive income is the beginning balance minus the other comprehensive income.

2. Way in which AOCI is similar to retained earnings

The balance of AOCI is presented in the Equity section of the Balance Sheet as is the balance of Retained Earnings , which aggregates past and current Earnings, and past and current Dividends.