Income statements can provide critical insight for investors regarding the health of a company, if they know how to read them. It's important to consider both operating and non-operating items on a income statement because a business could seem profitable in its primary activities and still be facing huge losses from non-operating expenses. Understanding some of the non-operating items on an income statement and the risks they present is important for most private investors.
Basics of Non-Operating Items
On income statements prepared according to generally accepted accounting principles, operating income or losses are separated from non-operating income and losses, to avoid confusion between the activities of the business and extraordinary or incidental events. In some cases, non-operating items are referred to as income from secondary activities, while the business's normal operations are considered primary activities. Non-operating items on an income statement includes anything that does not relate to the business's main profit-seeking operations, such as interest, dividends and capital gains or losses.
Interest and Investment Items
Every year, businesses realize income or experience losses related to their maintenance of cash accounts in banks. Usually, banks pay businesses interest on their account balances, and in some cases, businesses realize dividends or other returns on securities investments they own. This kind of income is not usually considered part of their normal business, so it will be itemized on the income statement as non-operating or secondary income. Investments in assets that the business uses in its primary activities -- such as plant assets -- are not part of this item.
Disposal of Assets
Businesses often sell or otherwise dispose of their long-term assets at a profit or a loss. This is because it's difficult for a business to perfectly account for fluctuations in the market value of their assets, even if they use well-accepted methods for depreciation. When a business realizes a gain or suffers a loss from the disposal of an asset, this record is itemized as on non-operating activity on their income statement. It's important for investors to note this item, as it can be a source of substantial loss for otherwise successful businesses.
Losses from taxes -- or income from tax refunds -- generally are not considered an operating activity, even though businesses pay taxes or claim tax credits in every accounting year. The term "earnings before interest and taxes" is often used interchangeably with net operating income. In some cases, taxes will be separated between operating and non-operating income statements, with taxes on activities like owning property and making sales included as an operating item. Other taxes, like income, franchise and excise taxes, are itemized as as non-operating expense.
- Financial Education: The Income Statement - Operating versus Non-Operating Components
- Vernimmen: Operating Income Vs. Non-Operating Income
- U.S. Securities and Exchange Commission: Beginners' Guide to Financial Statements
- AccountingCoach: Disposal of Assets
- AccountingCoach: Interest Income
- ZixCorp: Investment Income, Non-Operating