How to Distinguish Between Operating & Nonoperating Income in Relation to the Income Statement

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A company's profits consist of both operating income and nonoperating income.
A company's profits consist of both operating income and nonoperating income. (Image: Thinkstock/Comstock/Getty Images)

An income statement shows a company’s revenues, expenses and net income for an accounting period. Net income includes all of a company’s revenues and income minus its expenses. A company often separates its income statement into different sections to designate items that contribute to operating income and items that contribute to nonoperating income. A company’s operating income is the income that it generates from its everyday business, such as food income from a restaurant, while nonoperating income comes from other sources, such as a one-time award from a lawsuit. You can review a company’s income statement to determine how much of net income consists of operating income vs. nonoperating income.

Identify the line called “operating income” and its dollar amount, which is located directly below the operating expenses section, which is below the revenues section on an income statement. The amount of operating income equals the total amount of revenues that are generated from a company’s core operations listed in the revenues section minus the cost of goods sold minus the total amount of operating expenses. For example, if a company lists $10,000 in total revenues, $4,000 in cost of goods sold and $3,000 in total operating expenses, its operating income would be $3,000, which is the income generated from its core business.

Identify the section of the income statement called “nonoperating income” or “other income,” which is located below the operating income section, and find the dollar amount of the line called “total nonoperating income” at the bottom of the section. This section consists of income and expenses that are not part of a company’s daily business, such as interest income and expenses or gains and losses on the sale of assets or investments. The total nonoperating income amount equals the sum of the income items minus the sum of the expense items in the section.

Identify the section called “discontinued operations” and the line called “gain or loss from discontinued operations.” This section and total amount includes the income or loss from a clearly distinguishable business segment or subsidiary that a company has sold or ended or is in the process of selling or ending. Any income or expenses listed in this section are no longer a part of the company’s operations.

Identify the section called “extraordinary items” and the line called “extraordinary income or loss.” This section and total amount consists of items that are not part of a company’s normal operations and are both unusual in nature and infrequent in occurrence. For example, a company may report the loss from a fire in a building hit by lightning in this section.

Identify the section called “cumulative effect of change in accounting principle” and the total amount listed. This item occurs when a company changes its accounting method. The company will already include the effect of the change in the operating income for the current period. The amount in this particular section is not part of a company’s normal operations and includes the total effect the change has on prior years’ income statements.

Tips & Warnings

  • The names of each of these sections and items can vary, so review a company's income statement carefully to determine the type of income each section includes.

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