Non-operating Income

Saturday Brain Storming Thought (149) 22/01/2022

Non-operating Income

Non-operating income is the portion of an organization’s income that is derived from activities not related to its core business operations

Examples of Non-operating income

1) dividend income

2) asset impairment losses

3) gains and losses on investments

4) gains and losses on foreign exchange transactions

5) asset write-downs

Timing of Non-operating income

Non-operating income is more likely to be a one time event, such as loss on asset impairment

However, some types of income, such as dividend Incone, are of a recurring nature, and yet are still considered to be part on non-operating income

Presentation of Non-operating income

Non-operating income is itemized at the bottom of the income statement, after the operating profit line item

Fraudulent use of Non-operating income

A business might attempt to use non-operating income to mask poor operational results

For example, the receipt of a round of funding could invest the cash and generate such a large amount of interest income that is the largest part of total earnings reported

Some less ethical organizations try to characterize their non-operating income as operating income in order to mislead investors about how well their core operations are functioning

Operating Activities of companies

These are all the things a company does to bring it’s products and services to market

1) setting a strategy

2) organizing work

3) manufacturing (or sourcing) products and services

4) Marketing and selling it’s products and services
5) day-to-day management

Non-operating activities of companies

non-operating activities are one-time events that may affect revenues, expenses or cash flow, but fall outside of the companies routine, core business

1) relocating the business

2) expenses caused by weather damage

3) acquiring another firm

4) buying or selling capital assets

5) drawing down or paying off a loan

6) issuing new shares

Non-operating income formula

Non-operating income = Dividend income – losses due to asset impairment

+/- gains and losses realized after selling the investments 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 evente

Calculation is also done by

Non-operating income = Net Profit – operating profit – Net interest expense + income tax

Advantage of Non-operating income

1) Non-operating income gives an estimate of the proportion of income due to non-operating activities

2) it allows bifurcating the peripheral income and expenses from the mainstream income from the companies core operations

3) it allows the stakeholdes to compare the pure operating performance of the company and also draw a comparison across the peers

4) from the entitys point of view, reporting such income and expenses shows that the entity has nothing to hide

5) it establishes a transperant image of the entity

6) stakeholdes including employees and investors, feel more comfortable in taking the risk along with the entitys growth plans

7) reporting non-operating expenses also represent the non-core activities that can be cut down in times of dire need

8) it also helps the stakeholder in assessing more realistic figures instead of forgetting them and making plans based on fictitious numbers

Disadvantages of Non-operating income

1) it does not reflect the operating performance of the entity as it comprises on non-core business transactions

2) it may represent a false impression due to One-time events

3) some companies may use it to inflate or deflate the profit to pay fewer taxes or lure investors into raising money from the market

4) companies may disguise such transactions under other hear to manipulate the bottom line of the entitys income statement

5) investors should be cautious while analyzing the items that arise out of the non-core business transactions

6) non-operating incomes can increase tax burden of the organization

7) non-operating income if negative, can reduce the net income of the organization which ultimately affects the performance of the organization

8) higher non-operating income reflects defects in the operations of the organization

Limitations of Non-operating income

1) non-operating income and expenses are most likely one-time events such as loss due to asset impairment

2) some non-operating items are recurring in nature but are still considered as operating as they do not form the core business activities of the entity

Non-operating expenses

A non-operating expense is a cost that is not directly related to core business operations

1) interest payments on debts

2) restructuring cost

3) inventory write-offs

4) payments to settle lawsuits

5) losses from investments

6) currency fluctuations

7) disasters

8) change in accounting principles

Non-operating income and revenue

Non-operating income is the part of the business income that is clearly distinct from income derived from core business activities

It refers to revenue and cost generated from sources other than business operations such as gains or losses from investments

Non-operating assets

Non-operating assets are asset 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

These assets and any income from them are usually omitted from the financial analysis of a company’s core business

Compiled by;-

Avinash Kulkarni

Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer

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