Non-operating income is the portion of an organization'sincomethat is derived from activities not related to its core business operations. It can include items such asdividendincome,profitsor losses from investments, as well as gains or losses incurred by foreign exchange and asset write-downs. Non-operating income is also referred to as incidentalor peripheral income.
Key Takeaways
Non-operating income is the portion of an organization'sincomethat is derived from activities not related to its core business operations.
It can include dividend income, profits or losses from investments, as well as gains or losses incurred by foreign exchange and asset write-downs.
Separating non-operating income from operating income gives investors a clearer picture of how efficient a company is at turning revenue into profit.
Earnings are perhaps the single most studied number in a company'sfinancial statements because they show profitability compared withanalyst estimates and company guidance.
The problem is that profit in an accounting period can be skewed by things that have little to do with the everyday running of the business. For example, there are occasions when a company earns a significant, one-off amount of income from investment securities, awholly owned subsidiary, or the sale of a large piece of equipment, property or land.
These types of gains—on top of income earned from recurring events outside of the business’ main line of work—can significantly alter a company’s earnings and make it difficult for investors to measure how well the firm’s operations actually fared during the reported period.
Non-Operating Income vs. Operating Income
Differentiating what income was generated from the day-to-day business operations and what income was made from other avenues is important to evaluate a company’s real performance. That is why firms are required to disclose non-operating income separately from operating income.
Operating income is an accounting figure that measures the amount of profit realized from a business's operations, after deductingoperating expensessuch aswages, depreciation, andcost of goods sold(COGS). In short, it provides information to interested parties about how much revenuewas turned into profit through the company's normal and ongoing business activities.
Operating income is recorded on the income statement. Toward the bottom of the income statement, under the operating income line, non-operating income should appear, helping investors to distinguish between the two and recognize what income came from where.
Example ofNon-Operating Income
The main operations of retail stores are the purchasing and selling of merchandise, which requires a lot of cash on hand and liquid assets. Sometimes, a retailer chooses to invest its idle cash on hand in order to put its money to work.
If a retail store invests $10,000 in the stock market, and in a one-month period earns 5% in capital gains, the $500 ($10,000 * 0.05) would be considered non-operating income. When a person sets out to analyze this retail company, the $500 would be classified as nonoperating, or non-recurring, earnings because it can't be relied on as continuous income over the long term.
Alternatively, if a technology company sells or spins off one of its divisions for $400 million in cash and stock, the proceeds from the sale are considered non-operating income. If the technology company earns $1 billion in income in a year, it's easy to see that the additional $400 million will increase company earnings by 40%.
To an investor, a sharp bump in earnings like this makes the company look like a very attractive investment. However, since the sale cannot be replicated or duplicated, it can't be considered recurring operating income and should be removed from performance analysis.
Special Considerations
Sometimes companies try to conceal poor operating profit with high, non-operating income. Beware of management teams attempting to flag metrics that incorporate inflated, separate gains. Earnings before interest and taxes (EBIT) for example, can include incomederived from activities not related to the core business and can sometimes be advertised heavily by companies to mask underwhelming operational results.
Often a sharp spike in earnings from one period to the next will be caused by non-operating income. Seek to get to the bottom of where money was generated and to ascertain how much of it, if any, is linked to the everyday running of the business and is likely to be repeated.
Non-operating income is the portion of an organization's income that is derived from activities not related to its core business operations. It can include dividend income, profits or losses from investments, as well as gains or losses incurred by foreign exchange and asset write-downs.
Examples of non-operating expenses include interest payments and one-time expenses related to the disposal of assets or inventory write-downs. Non-operating expenses generally appear near the bottom of a company's income statement after operating expenses.
Non-operating expense, like its name implies, is an accounting term used to describe expenses that occur outside of a company's day-to-day activities. These types of expenses include monthly charges like interest payments on debt and can also include one-time or unusual costs.
“Nonoperating revenue” is revenue received or recognized for services that are not directly related to provision of health care services. This can include financial market returns, payments to hospitals for real estate (such as doctor office rentals), and income from endowments.
Investment income, gains or losses from foreign exchange, as well as sales of assets, writedown of assets, interest income are all examples of non-operating income items. Some of the non-operating income items are recurring, for example, dividend income, and interest income.
Non-operating activities are one-time events that may affect revenues, expenses or cash flow but fall outside of the company's routine, core business. Operating activities include: Setting a strategy. Organizing work. Manufacturing (or sourcing) products and services.
Operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development.
Non-operating assets are assets that are not considered to be part of a company's core operations. A company's non-operating assets may be unused land, spare equipment, investment securities, and so on. Income from non-operating assets contributes to the non-operating income of a company.
Assets that aren't used to make money are called non-operating assets and could include things like land that isn't being used, vacant buildings, unused or outdated machinery and idle equipment.
In contrast, a multi-step income statement divides both revenues and expenses into operating and nonoperating (other) items. The statement also separates operating expenses into selling and administrative expenses. A multi-step income statement is also called a classified income statement.
Total non-operating income is the total profit from a company not earned from the core business operations. Examples are gains from investments and dividend income (in non-investing businesses). Non-operating income is likely to be sporadic whereas core earnings are typically more stable.
Nonoperating expenses are business expenses that are outside of a company's main or central operations. (Some describe them as incidental or peripheral.) Losses often involve the disposal of property, plant and equipment for a cash amount that is less than the carrying amount (or book value) of the asset sold.
The salaries expense, rent expense, and advertising expense are all considered to be part of the operating expenses. The interest expense is a non-operating expense, which means it is not involved in generating operating income. Interest expense represents the cost charged on loans.
Most accountants record their non-operating expenses at the bottom of their income statements. This allows investors and key stakeholders to evaluate operational costs. As a result, non-operating payments may fall by the wayside.
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