LOS j: State the accounting classification for items that are excluded from the income statement but affect owners’ equity, and list the major types of items receiving that treatment.

Where in the financial statements should a firm recognize the unrealized gains and losses on cash flow hedging derivatives and the unrealized gains and losses on available-for-sale securities?

Cash flow hedging derivatives

Available-for-sale securities

A) Other comprehensive income Net income

B) Net income Other comprehensive income

C) Other comprehensive income Other comprehensive income

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Available-for-sale securities are reported on the balance sheet at fair value. The unrealized gains and losses bypass the income statement and are reported as a component of stockholders’ equity as a part of other comprehensive income.

Other comprehensive income includes non-owner transactions that affect shareholders’ equity and are not recognized in net income. Dividends paid are transactions with the owners of the firm, so dividends paid are not included in other comprehensive income. Foreign currency translation gains and losses are non-owner transactions that are not recognized in net income. Thus, foreign currency translation gains and losses are included in other comprehensive income.