Non Operating Income

What is Non-Operating Income?

Non-operating income is the income earned by a business organization from the activities other than its principal revenue-generating activity and examples includes profits/loss from the sale of a capital asset or from foreign exchange transactions, income from dividends, profits or other income generated from the from investments of the business, etc.

In simple words, a non-operating income of an entity is the income stream on the entity’s income statement that is driven by activities that do not fall under the core business operations of the entity. This type of non-core income stream may take one of many forms like gains or losses due to fluctuation in foreign exchange, asset impairments or write-downs, income from dividends arising out of investment in associatesInvestment In AssociatesInvestment in Associate are investments in an entity in which the investor has significant influence but not complete authority, like a parent and a subsidiary relationship. The investor has a significant influence when it has 20% to 50% of shares of another entity.read more, capital gains and losses from investments, etc. It is also known by the name peripheral or incidental income.

List of Non-Operating Income

Non-Operating Income Formula

It is usually shown as a “Net Non-Operating Income or Expense” at the bottom of the income statement. Most of the time, it appears after the “Operating Profit” line item.

It can be calculated, as shown below:

Net Non-Operating Income
= Dividend Income
– Losses due to asset impairment
+/- Gains and Losses realized after selling the investment in financial securities
+/- Gains and Losses due to transaction in foreign currency
+/- Gains and Losses due to nonrecurring one time events
+/- Gains and Losses due to recurring but non operating events

It may not have some fixed formula as it is more dependent upon the classification of the line item as operating or non-operating activity.

The calculation can also be done by –

Net Operating Income = Net Profit – Operating Profit – Net Interest Expense + Income Tax
Net Operating Income

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For eg:
Source: Non Operating Income (wallstreetmojo.com)

This is sort of a back-calculation to decipher the value pertaining to non-operating income and expenses from the entity’s income statement as some companies report such income and expenses under a different head.

Non-Operating Income Examples

Let’s look at some examples to understand this better.

Example #1

Let’s assume a fictitious company ABC with income statement as shown below:

Non operating income example1

Now in order to calculate the non-operating income from the above income statement, we can follow the back-calculation approach as follows:

Net-Operating Income = $150,000 – $200,000 + $40,000 + $30,000

= $20,000

Now, if we have a close look at the income statement shown above, it is quite obvious to point at the non-operating line item, i.e., Gain on sale of the asset. But to come to this line item’s value based on some formula, we used a back calculation formula, which gives the same value as for the Gain on sale of assets.

Example #2

Now let’s have a look at a real-life income statement of Microsoft company.

Non operating income example2

= $16,571,000 – $35,058,000+ $19,903,000

=$1,416,000

Advantages

Disadvantages

Limitations

Points to Remember

  • Non-operating income and expenses are most likely to be one-time events such as loss due to asset impairment.
  • Some non-operating items are recurring in nature but are still considered as non-operating as they do not form the core business activities of the entity.

Conclusion

Both tend to experience sudden ups and downs as operating performance tends to remain more or less the same for stable companies. It appears at the bottom of the income statement, after operating profit line item.

Recommended Articles

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