Non-operating income and expenses are the items on the income statement that are not related to the core business operations of a company. They include gains or losses from investments, foreign exchange, asset sales or disposals, impairments, and litigation. Non-operating income and expenses are important for financial analysis, as they can have a significant impact on the net income and the earnings per share of a company. In this blog post, we will explain what non-operating income and expenses are, how to calculate them, and how to account for them.

How to Calculate Non-operating Income and Expenses

Non-operating income and expenses can be calculated by using either the top-down approach or the bottom-up approach. The top-down approach starts with the revenue or sales and subtracts the cost of goods sold (COGS) and the operating expenses to obtain the operating income. Then, the non-operating income and expenses are subtracted from or added to the operating income to arrive at the net income. The bottom-up approach starts with the net income and adds back or subtracts the non-operating income and expenses to obtain the operating income.

The formula for calculating non-operating income and expenses using the top-down approach is:

Non-operating Income and Expenses=Net Income−Operating Income

The formula for calculating non-operating income and expenses using the bottom-up approach is:

Non-operating Income and Expenses=Net Income−(Revenue or Sales−COGS−Operating Expenses)

For example, let’s say that a company has $1,000,000 in revenue or sales, $600,000 in COGS, $200,000 in operating expenses, $50,000 in interest income, $20,000 in interest expense, $10,000 in foreign exchange gain, $30,000 in loss on asset sale, and $40,000 in taxes. Using the top-down approach, the non-operating income and expenses are:

Non-operating Income and Expenses=(1,000,000−600,000−200,000−40,000)−(1,000,000−600,000−200,000+50,000−20,000+10,000−30,000)=10,000

Using the bottom-up approach, the non-operating income and expenses are:

Non-operating Income and Expenses=(1,000,000−600,000−200,000−40,000)−(1,000,000−600,000−200,000)=10,000

As you can see, both methods give the same result of $10,000 in non-operating income and expenses.

How to Account for Non-operating Income and Expenses

Non-operating income and expenses are reported separately from the operating income and expenses on the income statement, under the headings of “Other Income and Expenses” or “Non-operating Income and Expenses”. This is to provide a clear distinction between the income and expenses that are derived from the core business activities and those that are not. Separating non-operating income and expenses from operating income and expenses also helps investors and analysts to evaluate the performance and profitability of the core business, excluding the effects of financing, investing, and other non-recurring or unusual items.

Non-operating income and expenses can be further classified into two categories: recurring and non-recurring. Recurring non-operating income and expenses are those that occur regularly or periodically, such as interest income, interest expense, and foreign exchange gain or loss. Non-recurring non-operating income and expenses are those that occur infrequently or irregularly, such as gain or loss on asset sale or disposal, impairment, and litigation. Recurring non-operating income and expenses are usually included in the calculation of the earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a common measure of operating performance. Non-recurring non-operating income and expenses are usually excluded from the calculation of the EBITDA, as they are considered to be one-time or extraordinary items that do not reflect the normal operations of the business.

Conclusion

Non-operating income and expenses are the items on the income statement that are not related to the core business operations of a company. They include gains or losses from investments, foreign exchange, asset sales or disposals, impairments, and litigation. Non-operating income and expenses are calculated by subtracting or adding them to the operating income, which is the income that is derived from the core business operations. Non-operating income and expenses are reported separately from the operating income and expenses on the income statement, under the headings of “Other Income and Expenses” or “Non-operating Income and Expenses”. Non-operating income and expenses can be further classified into recurring and non-recurring categories, depending on their frequency and regularity. Non-operating income and expenses are important for financial analysis, as they can have a significant impact on the net income and the earnings per share of a company, and also provide information about the sources and uses of funds for the company.