Page 81 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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expense on borrowed money and profits or losses on selling
nonbusiness assets that are likely to happen in the normal
course of doing business, but are not part of running the
business.
Typical examples include:
• Interest income and interest expense, considered financial
costs and not operating costs (unless your company is an
insurance company or a bank, for which the rules are dif-
ferent)
• Gain or loss on selling off equipment no longer used by
the company
• Gain or loss on the disposition of investments that were
incidental to the business.
These items are shown near the bottom of the income state-
ment so that they don’t detract from the reader’s conclusions
about how well the normal business of the company is going.
While typically small in relation to the operations of the busi-
ness, they are not necessarily minor. In fact, some of them can
become very large in relation to net income, especially if the
company’s profit margins are modest. An example might be the
sale of unused land the company has held for many years, often
at a price many times greater than the value at which it was
carried on the company’s books. When such items get very
large, they will most likely be labeled extraordinary items and
shown separately, sometimes even with a separate calculation
of earnings per share to show their impact on the bottom line.

Income Before Taxes, Income Taxes, and Net Income

We’re coming to the bottom of the page now, and we have now
arrived at a number often called pretax income. The formal label
you will most often see is income before taxes, although there
are variations of that as well, for reasons that even I don’t
understand. In any event, they all mean the same thing—the
income that the company expects to pay tax on, the amount on