Non-Operating ExpenseDefined along with Examples
What is a Non-Operating Expense?
Non-operating Expenses refer to the expenses of a company that do not form part of the core business functions.
Examples of non-operating expenses include those that result from financing and other items.
When preparing the Income Statement, the non-operating revenue and expenses are oftentimes excluded so that only the financial performance from the core business operations is computed.
Understanding Non-Operating Expense
Where operating expenses refer to the day-to-day expenses needed to run the business, non-operating expenses are those that are outside of that and includes interest expense, one-time expenses, and non-recurring expenses.
Other examples also include expenses that result from restructuring and reorganizing, the charges incurred from obsolete inventory, and the costs due to currency exchange.
When financial reports are prepared, specifically the Income Statement, the non-operating expenses are posted at the bottom so that the core operations of the business are computed and analyzed first.
This allows stakeholders and investors to determine the profitability of the company without having to consider the effect of non-operating expenses and income on the bottom line.
When the Income Statement is presented, the operating expenses are first subtracted after the Gross Profit is computed (Sales less Cost of Sales).
Once the Gross Profit is computed, the operating expenses are then subtracted to arrive at the Operating Income.
The Operating Income shows the profitability of the core operations of the business.
Once this is determined, the non-operating expenses are subtracted to arrive at the Earnings Before Taxes.
Once the taxes are subtracted, the Net Income is arrived at.
Below is an example of an Income Statement showing the above process:
Non-Operating Expense Examples
When a company makes a fixed asset purchase through financing, interest payments will be paid by the company along with the principal loan amount.
The interest payments are not considered part of the operating expenses of the company and are recorded as non-operating expenses.
In the same way, when a company has to pay for legal settlements that are apart from the normal legal expenses that a company incurs, this will also be considered a non-operating expense because it is a one-time occurrence.
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Cornell Law School "47 CFR § 32.7300 - Nonoperating income and expense." Page 1 . April 6, 2022