What is a Non-Operating Expense
A non-operating expense is an expense incurred by a business that is unrelated to the business' core operations. The most common types of non-operating expenses are depreciation, amortization, interest charges or other costs of borrowing. Accountants sometimes remove non-operating expenses and non-operating revenues in order to examine the performance of the business, ignoring effects of financing and other irrelevant issues.
BREAKING DOWN Non-Operating Expense
Non-operating expenses, like its name implies, is an accounting term used to describe expenses that occur outside of a company's day-to-day activities. These types of expenses include monthly charges like interest payments on debt, but can also include one-off or unusual costs. For example, a company may categorize any costs incurred from restructuring or reorganizing, costs from currency exchange, or charges on obsolete inventory as non-operating expenses. Expenses relating to employee benefits, such as pension contributions, would also be considered a non-operating cost.
An Example of Non-Operating Expenses on a Financial Statement
Most public companies finance their growth with a combination of debt and equity. Regardless of the allocation, any business that has corporate debt also has monthly interest payments on the amount borrowed. This monthly interest payment is considered a non-operating expense because it does not arise during a company's core operations. Expenses like these are recorded at the bottom of a company's financial statements.
So, when looking at a company's income statement from top to bottom, operating expenses are the first costs displayed. The company starts the preparation of its income statement with top-line revenue. The firm's cost of goods sold (COGS) is then subtracted from its revenue to arrive at its gross revenue. After gross revenue is calculated, all operating costs are then subtracted to get the company's operating profit, or earnings before interest, tax, depreciation, and amortization (EBITDA). Then, after operating profit has been derived, all non-operating expenses are recorded on the financial statement.
Non-operating expenses like interest, depreciation and amortization are subtracted from the company's operating profit to arrive at its earnings before taxes (EBT). Taxes are then assessed to derive the company's net profit.
Non-Operating Expenses and Financial Ratios
Non-operating expenses are sometimes used by a company to adjust its financials. If, for example, a company wants to lower its tax burden, it can recognize depreciation and amortization at a higher rate, effectively reducing its pretax profit, but not reducing its cash flow, seeing as they are both non-operating and non-cash expenses.
A company can also manipulate its non-operating expenses to change many of its financial performance ratios. Interest payments can be lowered, for example, to increase profit margins. This is why many accountants remove non-operating expenses in financial analyses.