Financial Education

On the income statement, accounting standards encourage separate treatment of operating and non-operating items. Operating items are those relating to the day-to-day management of the enterprise: sales, cost of sales, selling, general and administrative expense, research and development costs, etc. Often the net of these items is presented as a subtotal, operating income.

Non-operating items include investing and financing activities, which are reported separately from operating income (unless pertaining to a financial services firm, for which such items are operational.) Non operating items include the interest, dividends and profits on investments made in the securities of other companies; interest expense; etc.

Some investments in other companies are made for strategic reasons, such as access to raw materials. In these cases, investors and analysts may wish to classify the investments as operating.

While taxes are a normal operating expense, they are also affected by non-operating items. Often, analysts will adjust operating profit by the tax rate to arrive at NOPAT (net operating profit after tax.)

For more information, see all articles on: Adjusting Reported Financial Statements, Financial Statement Analysis, Fundamental Analysis, Investing in Stocks

See also:

Cash Flow from Operating Activities

Operating Leverage

Pre-tax income

Cash Flow Statement - The Indirect Method

Interest and Dividends: Differences Between US GAAP and International Accounting Standards