Which of the following would most likely be considered nonoperating income?
Companies often incur expenses that aren’t directly related to the day-to-day operating costs of running the business. These are categorized as non-operating expenses, and it’s a good accounting practice to tally them separately on a company’s income statement. This makes it easier for financial managers, investors and other stakeholders to get a clearer picture of the performance of the business. Show
What Is a Non-Operating Expense?A non-operating expense is a cost that isn’t directly related to core business operations. Examples of non-operating expenses are interest payments on debt, restructuring costs, inventory write-offs and payments to settle lawsuits. By recording non-operating expenses separately from operating expenses, stakeholders can get a clearer picture of company performance. Key Takeaways
Non-Operating Expenses ExplainedTo get a clear picture of the performance of a business, it generally makes sense to separate out expenses and income sources that aren’t directly related to core business operations. For example, a business might be profitable, but a one-time cost such as a write-off of obsolete inventory could result in a net loss. On the other hand, the company might sell a non-core business line, realizing a gain that temporarily boosts its bottom line. Keeping these non-operating expenses and income separate on the company’s financial statements makes it easier to see how the core business performed during any specific accounting period. This also helps to track trends in performance and more accurately forecast how the business will perform in the future. Accounting software helps with the basic financial tracking to make the predictions and planning as accurate as possible. Operating vs Non-Operating Expenses: What’s the Difference?Operating expenses are those directly associated with running the business — although they don’t include cost of goods sold (COGS), which is generally listed separately on a company’s income statement. What Is an Operating Expense?Operating expenses include a wide variety of expenses for day-to-day operations, including administrative and sales costs. Examples include:
Key differences between operating and non-operating expenses:Operating expenses are costs that a company must make to perform its operating activities — the primary activities that generate revenue. Non-operating expenses are costs that were not directly required for those activities. Capital Expenses vs Operating ExpensesCapital expenditures are a type of expense that is treated differently than operating and non-operating expenses. What is a capital expense?In accounting terms, a capital expense is a cost that a business incurs to buy or add value to an asset. An asset is defined as an item with a future economic benefit, such as an office building or equipment with a service life of several years. A significant upgrade to an existing asset is also considered a capital expenditure. Key differences between capital expenses and operating expenses:While the costs of performing operating activities are considered operating expenses, the costs of acquiring assets to support those activities are generally capital expenses. For example, buying expensive office equipment is a capital expense; day-to-day repairs and maintenance to keep that equipment running are operational expenses. Recording capital expenses: Capital expenses are not recorded on income statements when the asset is purchased. Instead, they are documented as assets on a company's balance sheet. However, some assets decrease in value over time, a process known as depreciation (for fixed tangible assets such as computers or other business equipment) or amortization (for intangible assets such as intellectual property). The depreciation or amortization during each accounting period is calculated and reflected as an expense on the income statement. If the asset is used for core business activities, this expense is categorized as an operating expense. Capital Expenses vs Non-Operating ExpensesCapital expenses are also treated differently from non-operating expenses, since capital expenses are initially documented as assets on the balance sheet while operating expenses appear on the income statement. The asset’s depreciation or amortization may be recorded as a non-operating expense if the asset is not used for the core business. 9 Common Types of Non-Operating ExpensesCommon types of non-operating expenses include:
#1 Expense Recording Non-Operating ExpensesNon-operating expenses are generally maintained in separate general ledger accounts from operating expenses. Operating Expenses on Income StatementsNon-operating expenses are listed near the bottom of a company’s income statement after operating expenses. Some companies distinguish between the different types of non-operating expenses listed in income statements. For example, interest payments may be listed separately from unusual or extraordinary non-operating expenses such as a one-time write-down of inventory or damage due to a natural disaster. Non-operating expenses are generally grouped together with non-operating income (income from non-operating activities, such as interest on investments) on the income statement. Non-Operating Expense Examples Home Depot’s income statement for the 2019 fiscal year showed operating income of $15,843 million after deducting operating expenses (including depreciation and amortization) from net sales. The company reported non-operating expenses (listed as “interest and other (income) expense”) of $1,201 million in interest expense, offset by $73 million in non-operating income from interest and investments. Net non-operating expense was therefore $1,128 million ($1,201 million - $73 million). This amount was deducted from operating income to calculate earnings before income taxes of $14,715 million. Selected items from Home Depot income statement for the fiscal year ended Feb. 2, 2020 (amounts in $ millions)Net sales110,225Cost of sales72,653Gross profit37,572Operating ExpensesSelling, general and administrative19,740Depreciation and amortization1,989Total operating expenses21,729Operating income15,843Interest and other (income) expenseInterest and investment income(73)Interest expense1,201Interest and other, net1,128Earnings before provision for income taxes14,715 Non-Operating Expenses FAQWhy should a company separate out non-operating expenses?Separating non-operating expenses and income separate on financial statements makes it easier to see how the core business performed during a given accounting period. This also helps to track trends in performance and more accurately forecast how the business will perform in the future. What types of businesses have non-operating expenses?Most businesses will have some sort of non-operating expenses. While larger companies are likelier to have expenses like restructuring costs and investment losses than small businesses, businesses of all sizes are likely to make interest payments depreciate assets. What are the benefits of recording non-operating expenses?Recording non-operating expenses is a standard accounting practice. Keeping an accurate record of non-operating expenses allows companies to deduct them from operating profits. Which of the following is not considered operations income?Interest expense, interest income, and other non-operational revenue sources are not considered in computing for operating income.
Which is a nonNonoperating income relates to peripheral or incidental activities of the company. For example, a manufacturer would include interest and dividend revenue, gains and losses from selling investments, and interest expense in nonoperating income.
What are non operating items?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.
Where is nonNon-operating income is itemized at the bottom of the income statement, after the operating profit line item.
|