Question: In Year One, Valente’s investment in the shares of Bayless Corporation rose in value by $3,000. If those
investments are classified as available-for-sale, this unrealized gain does not impact reported net income but,
rather, stockholders’ equity. This handling is justified because the investor will not necessarily sell these shares in
the near future so that numerous subsequent changes in value are likely to take place.
However, net income seems a bit misleading since it does not reflect the increase in the reported worth of this
asset. Assume, for example, that Valente reports total net income for Year One of $80,000. That figure includes no
part of the $3,000 unrealized gain. What reporting is necessary to help investors understand the impact on income
of a change in value when investments are labeled as available-for-sale?
Answer: Indeed, the completeness of reported net income in such situations can be questioned. As noted, changes
in the value of available-for-sale securities create unrealized gains or losses that appear in the stockholders’ equity
section of the balance sheet but not in net income. To help decision makers better evaluate the reporting company,
a second income figure is disclosed that does include these gains or losses. The resulting balance is known as
comprehensive income. It can be shown on the bottom of a company’s income statement or in a separate schedule.
Here, by adding in the $3,000 change in fair value, Valente’s net income figure is adjusted to the more complete
total.
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