Nonoperating income or expense

If a company earns income from a source that isn't part of its normal revenue-generating activities, it usually lists this income on the income statement as nonoperating income. Items commonly listed here include the sale of a building, manufacturing facility, or company division. Other types of nonop-erating income include interest from notes receivable and marketable securities, dividends from investments in other companies' stock, and rent revenue (if the business subleases some of its facilities).

Companies also group one-time expenses in the nonoperating section of the income statement. For example, the severance and other costs of closing a division or factory are shown in this area, or, in some cases, a separate section on discontinuing operations is shown on the statement. Other types of expenses include casualty losses from theft, vandalism, or fire; loss from the sale or abandonment of property, plant, or equipment; and loss from employee or supplier strikes.

You usually find explanations for income or expenses from nonoperating activities in the notes to the financial statements. Companies need to separate these nonoperating activities; otherwise, investors, analysts, and other interested parties can't gauge how well a company is doing with its core vj^BE*

operating activities. The core operating activities line item is where you find a company's continuing income. If those core activities aren't raising enough income, the firm may be on the road to significant financial difficulties.

A major gain may make the bottom line look great, but it could send the wrong signal to outsiders, who may then expect similar earnings results the next year. If the company doesn't repeat the results the following year, Wall Street will surely hammer its stock. A major one-time loss also needs special explanation so that Wall Street doesn't downgrade the stock unnecessarily if the one-time nonoperating loss won't be repeated in future years.

Whether a gain or a loss, separating nonoperating income from operating income and expenses helps prevent sending the wrong signal to analysts and investors about a company's future earnings and growth potential.

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