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 on the balance sheet as the reduction of a liability, and on the cash flow statement as a cash outflow.
A payment-in-kind (PIK) loan is one in which the interest is not paid regularly in cash installments and is instead added to the principal payment at maturity. The interest for PIK loans appears on the income statement as an interest expense (or interest income if the firm is the lender), even though no actual interest payments have been made or received. The concept of payment in kind can also be applied to a bond or equity security. A PIK bond makes interest payments by issuing more bonds to the investor at maturity, and a PIK equity security pays dividends in the form of more shares being issued to the investor.
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 tha