Non Operating Income

Updated on April 30, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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.  Thus, it is the income stream on the entity’s income statement driven by activities that do not fall under the core business operations of the entity.

Non Operating Income Definition

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Source: Non Operating Income (wallstreetmojo.com)

This type of non-core income stream may take 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.

Non-Operating Income Explained

The net non operating income are the ones that the entity earns from sources other than the main business activities of the organization. Some  examples include profits/loss from the sale of a capital asset or foreign exchange transactions, income from dividends, profits, or other income generated from the investments of the business, etc. Thus, they are not attributable to the main operation.

They do not occur frequently or regularly and so they are not used to measure how much successful a business it. They are also known as incidental or peripheral income. They also depend on the type of business. Both 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 the operating profit line item.The net non operating income and expenses are 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 non-operating as they do not form the core business activities of the entity.

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List Of Non-Operating Income

Dividend income arising due to investment into associates

Gains due to investment in financial securities

Gains due to transactions in foreign currency and hence are affected by fluctuations in foreign exchange rates

Any gains which may be a one-time non-recurring eventNon-recurring EventNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off.read more

Any gains which are recurring but non-operating

Formula

Let us look at how to calculate non operating income. 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 transactions in foreign currency

+/- Gains and Losses due to non-recurring 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.

This is a back-calculation to decipher the value of non-operating income and expenses from the entity’s income statement. Some companies report such income and expenses under a different head. Thus, the above is the non operating income formula.

Examples

Let’s look at some examples to understand how to calculate non operating income.

Example #1

Let’s assume a fictitious company ABC with an 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 look closely at the income statementThe Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more 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 the sale of assets.

Example #2

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

Non operating income example2

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

=$1,416,000

The above formula helps us to find out non operating income.

Advantages

Disadvantages

Non Operating Income Vs Operating Income

Non operating income are generated from activities not related to the business and operating income is generated from the core business operation. Let us look at the differences between them.

Non Operating IncomeOperating Income
Generated from activities not related to business.Generated from activities  related to business.
It is a non-operatng income.It is the earning before interest and tax.
Gain due to investment in foreign currency, dividend from associate companies, etc.Gain after selling the products and services.
It is not very useful in taking company performance related decisions.It is used in management decision making.

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