Saturday 23 March 2013

What are non-operating revenues and expenses?

Nature of non-operating revenues and expenses

Income from continuing operations is usually presented in the following two formats: single-step or multi-step. In the single-step format, items are classified into two groups as follows: revenues and expenses. In the multi-step format, operating revenues and expenses are reported separately from non-operating revenues and expenses.
Non-operating revenues and expenses are associated with secondary (not main/central/core) operations of an entity.


Examples of non-operating revenues and expenses 


For example, universities’ main operations usually involve such activities as providing educational services, research funding, etc. As the result, in this case the following revenues and expenses may be classified as operational: tuition and fees, research grants, investment income, education expenses, etc. A university might recognize certain gifts and bequests as non-operating revenue as such revenue source might be not associated with the main activities of the university.


A hospital might recognize the following items as non-operating revenues and expenses as such operations represent other health-care related activities: income from investments, appropriations (i.e., funds provided by government) and grants (i.e., funds given for special purposes), support services (e.g., parking fees, parking personnel wages, public relations expenses, revenue from the gift shop, cafeteria sales, income from hotel operations, and rental income).

Non-operating revenues of a bank could be generated by such non banking activities as: insurance, real estate development, pension products, etc.
An apartment complex might have the following sources of other income: vending machines, laundry, application fees, late fees, etc.

In general, non-operating revenues and expenses are often combined and reported as other income (expense). An example of a multi-step format statement is presented below:

Sales:      
  Sales    
xxx
  Less:    Sales discounts  
xxx
 
               Sales returns and allowances  
xxx
(xxx)
  Net sales    
xxx
Cost of goods sold    
xxx
Gross profit    
xxx
Operating expenses:      
  Selling expenses      
  Sales salaries
xxx
   
               Commissions
xxx
   
               Advertising expense
xxx
   
               Supplies expense
xxx
xxx
 
  General and administrative expenses      
               Office salaries
xxx
   
               Bad debt expense
xxx
   
               Depreciation of office building
xxx
   
               Depreciation of office furniture
xxx
   
               Utilities expense
xxx
   
               Insurance expense
xxx
xxx
 
  Total operating expense    
(xxx)
Operating income    
xxx
Other revenues:      
  Interest income  
xxx
 
  Dividend income  
xxx
xxx
Other expenses:      
  Interest expense    
(xxx)
Income from continuing operations    
xxx
To mask a decline in operating performance, a company might classify non-operating income as operating revenues or operating expenditures as non-operating expenses. To identify such type of earnings management, it is possible to look at temporal inconstancies in classifying revenues and expenses in accordance with company’s definition of operating income and expenses.

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