The part of a company’s income that is not attributable to its core business operations
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Non-operating income refers to the part of a company’s income that is not attributable to its core business operations. It is a category in a multi-step income statement. 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. Others are non-recurring, such as asset writedowns and gains or losses from the sale of an asset.
Summary
- Non-operating income refers to the income that is not attributable to the company’s core business operations. Gains/losses from investment, foreign exchange, and sale of assets are some examples.
- Some non-operating items are recurring, but many are non-recurring.
- Non-operating and operating incomes are reported on separate lines in a multi-step income statement.
Operating Income and Non-Operating Income
A company’s income can be classified into two categories: operating and non-operating. Operating income is also known as earnings before interest and taxes (EBIT). It is the income generated through the company’s core business operations. It shows the company’s performance on its recurring day-to-day operations.
Non-operating income includes the gains and losses (expenses) generated by other activities or factors unrelated to its core business operations.
A company’s operating income and non-operating income are identified in a multi-step income statement, as shown below:
Operating income is calculated by subtracting the cost of goods sold and all the operating expenses from the company’s sales revenue. Operating expenses are the expenses incurred to run its core operations. Examples include depreciation, SG&A expenses, as well as R&D expenses.
By adding up the non-operating income to the operating income, the company’s earnings before taxes can be calculated. If the total non-operating gains are greater than the non-operating losses, the company reports a positive non-operating income. If the non-operating losses exceed the total gains, the company realizes a negative non-operating income (loss).
Operating incomes are recurring and are more likely to grow along with the expansion of the company. Compared with non-operating income, operating income provides more information about the fundamentals and growth potential of the company.
A company that performs better in and generates the majority of its income through its core business operations is more favorable than one that makes most of its income from non-operating activities. Distinguishing a company’s ability to profit from its core business and profit from other activities or factors is essential to evaluating its real performance.
A multi-step income statement can better reveal a company’s financial health than a single-step income statement, which does not classify incomes or expenses into the operating and non-operating categories.
Practical Example
Assuming after subtracting the cost of goods sold and all of the operating expenses from the sales revenue, a company reported an operating income of $200,000 for one year. In addition to running its core business, the company also made some investments, which brought in $10,000 in dividends and $8,000 in interest income. During the year, the company paid a $6,000 interest for its previous financing and sold a piece of land at a loss of $4,000. Also, it was sued and was charged for $15,000.
The company’s gains from investment (dividends and interests), interest expense to credit-holders, and losses caused by the sale of land and lawsuit are all non-operating gains or losses. Overall, the company incurred a net non-operating loss of $7,000 for the year after adding up the gains and subtracting losses. Its income before taxes is $13,000. Assuming a 25% tax rate, the company’s net income is $9,750.
Accounting Manipulation
Many non-operating gains or losses are non-recurring, which leaves room for accounting manipulation. A company may record a high non-operating income to hide its poor performance on core operations. It may also manipulate its operating income by including gains incurred by activities unrelated to the core business. A sudden, substantial increase in profit could be caused by by the inclusion of non-operating income.
More Resources
Thank you for reading CFI’s guide to Non-Operating Income. To keep advancing your career, the additional resources below will be useful:
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FAQs
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 items such as dividend income, profits or losses from investments, as well as gains or losses incurred by foreign exchange and asset write-downs.
What are examples of non-operating income? ›
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.
Is non-operating income the same as net income? ›
Net income refers to the profits of the business after accounting for all income and expenses. This includes not just the operating income but also non-operating expenses.
What is the difference between operating and non-operating revenue? ›
Operating revenue is generated by a company's primary business activities. Operating revenue can be compared year-over-year to assess the health of a company and its operations. Operating revenue should be separated out from non-operating revenue that occurs from infrequent, unusual, or one-time events.
Is service revenue a non-operating income? ›
Service revenue is an account that is used to record the total amount of money received from providing services and is typically considered an operating expense, not a permanent account.
Is rent income a non-operating income? ›
Rental Income: If a company owns real estate that it leases to others, the income from these leases would be considered non-operating income unless the company's primary business is real estate leasing.
What does non-operating mean? ›
: not functional or operational : nonoperational.
What is non-operating income formula? ›
It can be calculated, as shown below: Net Non-Operating Income. = Dividend Income. – Losses due to asset impairment.
Does gross profit include non-operating income? ›
Gross profit is the amount a business has earned minus the direct costs of manufacturing or the cost of goods sold. Operating profit is the amount of the gross profit minus operational costs. Net profit is the total amount left over after the business has accounted for all deductions, including interest and taxes.
What is a good operating income? ›
A general rule of thumb is that a good operating profit margin sits between 10–20%, meaning the business has a profit of 20 cents on each dollar of revenue after operating costs have been deducted. However, this can vary from industry to industry.
Like non-operating costs, non-operating income is also most likely to be a one or two-time occurrence. Examples of non-operating income include interest income, writedown on assets, gains or losses from currency translations and foreign exchange, sales of assets, etc.
What is an example of operating and non-operating revenue? ›
For example, the revenue generated from the total sale of iPhones worldwide is an operating revenue for Apple, whereas the revenue generated from sale of old office furniture would be a non-operating revenue.
What are two examples of operating and non revenue producing? ›
Non revenue producing: The gifts donated by the alumni. Operating revenue: The food making and rooms in a hotel.
What is non-operating revenue in accounting? ›
Non-operating revenue is the total amount of profit or losses that you cannot attribute to core business activities. Companies can record it as part of their income statement to give an accurate number of how much money the company is making beyond its industry's normal scope.
Is non-operating income included in EBITDA? ›
EBITDA, however, reflects operating performance by excluding interest, taxes, depreciation, and amortization, providing a clearer view of operational profitability by excluding non-operating expenses and non-cash items.
What are non-operating activities? ›
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.
What is an example of operating and non-operating expenses? ›
Key Takeaways
Operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development. By contrast, a non-operating expense is an expense incurred by a business that is unrelated to the business's core operations.
What is an example of non-operating income in healthcare? ›
For a healthcare organization, non-operating income might include parking fees, fines billed to clients for late- or non-payments, break room vending machines and cafeteria sales, and gift shop purchases, and gains and losses from selling assets (like equipment).
What are the non-operating items? ›
Non-operating components on the income statement include revenue and expense items that were not generated during the regular course of business operations. Due to the material nature of non-operating items, they are always reported exclusively i.e. separate from operating items in a company's financial statements.
