A non-operating expense is a business expenditure that is unrelated to a company’s core operations. Common types include interest charges and losses from the sale of assets. To evaluate the core business performance, analysts often remove non-operating expenses and revenues, as these reflect activities outside the regular business operations. Non-operating expenses are distinguishable from operating expenses, which pertain to essential daily business functions.
Key Insights
- Definition: Non-operating expenses are incurred from costs that don’t directly connect to a company’s primary business activities.
- Placement in Income Statement: These expenses are subtracted from operating profits and are found at the bottom of a company’s income statement.
- Examples: Interest payments, asset write-downs, and costs from currency exchanges.
Understanding Non-Operating Expenses
Non-operating expenses are costs that occur outside of day-to-day business activities. For instance, expenses such as interest on debt, restructuring costs, and write-downs of obsolete inventory are classified as non-operating. These expenses are recorded at the bottom of an income statement, aiding in the clearer assessment of direct business activities at the top of the statement, thus highlighting the profit generated from core operations.
Special Considerations
In a company’s income statement, operating expenses appear after revenue. The preparation of an income statement begins with revenue, from which the cost of goods sold (COGS) is subtracted to arrive at gross income. Subsequent operating costs are then deducted to calculate the company’s operating profit, also known as earnings before interest and tax (EBIT). Following this, non-operating expenses are deducted from operating profit to derive earnings before taxes (EBT), which are further reduced by taxes to yield net income.
Non-Operating Expense Examples
- Interest Payments: Regular interest charges related to business debt are classified as non-operating expenses because they are outside the company’s core function.
- Losses from Asset Sales: For example, if a company incurs a loss from selling a building that is not central to its operations (e.g., it is not a real estate business), this loss is categorized as a non-operating expense.
Frequently Asked Questions
Why do companies separate out non-operating expenses?
Separating non-operating expenses helps in understanding a company’s profitability from core operations by excluding costs that do not relate to regular business activities. This provides a clearer picture of how well the company is performing operationally.
What are examples of non-operating expenses?
Examples include interest payments, costs of disposing of non-core property or assets, restructuring costs, inventory write-downs, lawsuits, and other one-time charges.
Are rent and utilities non-operating expenses?
Typically, no. Rent and utilities are directly related to a business’s core operations. Without incurring these costs, the business cannot function effectively.
Related Terms: Operating Expenses, Income Statement, Net Income, Gross Income, Cost of Goods Sold.
