1.2.2.4. Interest, Taxes, and Net Income
After the operating income/loss has been calculated, non-operating income is added to it, and non-operating expenses are deducted. Non-operating expenses are any expenses that don’t come from the company’s business functions.
A frequent source of non-operating income is interest income, which is money that a company receives on invested funds. For example, if a company parks cash in a money market account for a few weeks, the money it receives from that investment is interest income.
For most companies, interest expense is larger than interest income. Interest expense represents the interest that a company pays on money it borrows. Interest income and interest expense are most often shown as separate figures. Sometimes they are netted together and displayed as a single line item.
Note: Unlike interest expense, repayment of principal is not shown on the income statement. This is because repaying the amount borrowed is not considered an expense. Instead the repayment of principal is reflected as the reduction of a liability on the balance sheet, and as a cash outflow on the cash flow statement.
A “payment in kind” loan is one in which the interest is added to the principal and paid in full at maturity. The interest for “payment in kind” loans appears on the income statement as an interest expense (or interest income, as the case may be), even though no actual income payments have been made or received.
Often, an income statement will contain a section listing other revenues and expenses. Other revenues, sometimes identified as other income, is a category within non-operating income for income that is not easily categorized elsewhere. For example, gains on foreign exchange or miscellaneous rent would fall into this category. Likewise, other expenses are a category of non-operating expenses that don’t really fit into any other category.