Question

In your own words,What do you think about a company that has an increase in non operating income vs the prior year( using horizontal analysis)?

Answer 1

Answer:-

Non Operating Income:-

Non-operating income is the portion of an organization's income that is derived from activities not related to its core business operations. It can include items such as dividend income, profits or losses from investments, as well as gains or losses incurred by foreign exchange, and asset write-downs.

Horizontal Analysis:-

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

• Non-operating income refers to the income that is not attributable to the company’s core business operations. Gains/losses from investment, foreign exchange, and sale of assets are some examples.
• Some non-operating items are recurring, but many are non-recurring.
• Non-operating and operating incomes are reported on separate lines in a multi-step income statement.

A company’s income can be classified into two categories: operating and non-operating. Operating income is also known as earnings before interest and taxes (EBIT). It is the income generated through the company’s core business operations. It shows the company’s performance on its recurring day-to-day operations.

Non-operating income includes the gains and losses (expenses) incurred by other activities or factors unrelated to its core business operations.

Operating income is calculated by subtracting the cost of goods sold and all the operating expenses from the company’s total revenue. Operating expenses are the expenses incurred to run its core operations. Examples include depreciation, SG&A expenses, as well as R&D expenses.

By adding up the non-operating income to the operating income, the company’s earnings before taxes can be calculated. If the total non-operating gains are greater than the non-operating losses, the company reports a positive non-operating income. If the non-operating losses exceed the total gains, the company realizes a negative non-operating income (loss).

Operating incomes are recurring and are more likely to grow along with the expansion of the company. Compared with non-operating income, operating income provides more information about the fundamentals and growth potential of the company.

A company that performs better in and generates the majority of its income through its core business operations is more favorable than one that makes most of its income from non-operating activities. Distinguishing a company’s ability to profit from its core business and profit from other activities or factors is essential to evaluating its real performance.

A multi-step income statement can better reveal a company’s financial health than a single-step income statement, which does not classify incomes or expenses into the operating and non-operating categories.