Posted in Finance, Accounting and Economics Terms, Total Reads: 420
Definition: Non-Operating Income
The share of income of a firm derived from non-core operations is known as the Non-operating income. A firm may realize income through dividends in other companies, from investments in property and assets, currency exchange, sale of subsidiary or a division, etc. apart from its core activities. This income is usually non-recurring in nature i.e. does not repeat during the natural course of business cycle, and thus is separated from several profitability measures.
It is an important concept for analysts who might want to uncover if the business has been using non-operating income to hide the poor operational results. This may happen if the business inflates the profit figures by including large, one-time non-operating income. Also it is a cause for suspicion if the firm experiences sudden peaks and decline in year-to-year reports as core earnings from the core activities tend to remain stable over time.
To identify above inconsistencies, one must observe the temporal changes in revenues and expenses in relation to the company’s definition of operating revenues and expenses. While evaluating a company’s performance over time, non-operating income is excluded, since they are non-repetitive items that are unlikely to recur, for example income gained through the sale of a division is a one-time only event that cannot be re-performed in near foreseeable future.