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.
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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