operating income
(noun)
Revenue - operating expenses. (Does not include other expenses such as taxes and depreciation).
Examples of operating income in the following topics:
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Operating Margin
- The operating margin is a ratio that determines how much money a company is actually making in profit and equals operating income divided by revenue.
- It is found by dividing operating income by revenue, where operating income is revenue minus operating expenses .
- That means that it does not include things like interest and income tax expenses.
- Since non-operating incomes and expenses can significantly affect the financial well-being of a company, the operating margin is not the only measurement that investors scrutinize.
- The operating margin is found by dividing net operating income by total revenue.
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Basic Earning Power (BEP) Ratio
- The purpose of BEP is to determine how effectively a firm uses its assets to generate income.
- This may seem remarkably similar to the return on assets ratio (ROA), which is operating income divided by total assets.
- EBIT, or earnings before interest and taxes, is a measure of how much money a company makes, but is not necessarily the same as operating income:
- The distinction between EBIT and Operating Income is non-operating income.
- Since EBIT includes non-operating income (such as dividends paid on the stock a company holds of another), it is a more inclusive way to measure the actual income of a company.
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Times-Interest-Earned Ratio
- Interest Charges = Traditionally "charges" refers to interest expense found on the income statement.
- EBIT = Earnings Before Interest and Taxes, also called operating profit or operating income.
- EBIT is a measure of a firm's profit that excludes interest and income tax expenses.
- It is the difference between operating revenues and operating expenses.
- When a firm does not have non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.
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Introduction to the Income Statement
- The income statement reflects a company's operating performance.
- The income statement is also referred to as a "profit and loss statement" (P&L), revenue statement, statement of financial performance, earnings statement, operating statement and statement of operations.
- It then calculates operating expenses and, when deducted from the gross profit, yields income from operations.
- Adding to income from operations is the difference of other revenues and other expenses.
- When combined with income from operations, this yields income before taxes.
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Operating Expenses, Non-Operating Expenses, and Net Income
- Operating expenses and non operating expenses are deducted from revenue to yield net income.
- In real estate, operating expenses comprise costs associated with the operation and maintenance of an income-producing property, including property management fees, real estate taxes, insurance, and utilities.
- Non operating expenses include loan payments, depreciation, and income taxes.
- When net income is positive, it is called profit.
- Operating expenses, non operating expenses and net income are three key areas of the income statement.
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Defining the Income Statement
- Income statement, also referred to as profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations, is a company's financial statement that indicates how the revenue (cash or credit sales of products and services before expenses are taken out) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as Net Profit or "bottom line").
- The income statement can be prepared in one of two methods.
- It then calculates operating expenses and, when deducted from the gross profit, yields income from operations.
- Adding to income from operations is the difference of other revenues and other expenses.
- When combined with income from operations, this yields income before taxes.
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Income Statement Formats
- An income statements may also be referred to as a profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations.
- In the multiple-step format revenues are often presented in great detail, cost of goods sold is subtracted to show gross profit, operating expenses are separated from other expenses, and operating income is separated from other income.
- When net income is positive, it is a called profit.
- Net income increases when assets increase relative to liabilities.
- Thus, the balance sheet has a direct relation with the income statement.
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Net Income
- Net income in accounting is an entity's income minus expenses for an accounting period.
- Net income in accounting is an entity's income minus expenses for an accounting period.
- It is computed as the residual of all revenues and gains over all expenses and losses for the period and has also been defined as the net increase in stockholder's equity that results from a company's operations.
- Often, the term income is substituted for net income, yet this is not preferred due to the possible ambiguity.
- Net sales (revenue) – Cost of goods sold = Gross profit – SG&A expenses (combined costs of operating the company) = EBITDA – Depreciation & amortization = EBIT – Interest expense (cost of borrowing money) = EBT – Tax expense = Net income (EAT)
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Preparation of the Statement of Cash Flows: Indirect Method
- The following rules can be followed to calculate cash flows from operating activities:
- Expenses with no cash outflows are added back to net income (depreciation and/or amortization expense are the only operating items that have no effect on cash flows in the period);
- Under the indirect method, since net income is a starting point in measuring cash flows from operating activities, depreciation expenses must be added back to net income.
- Therefore, cash operating expenses were only $80,000.
- The net cash flow from operating activities, before taxes, would be:
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Special Reporting
- Irregular items require special reporting procedures, and include discontinued operations, extraordinary items, and the reporting of the resultant EPS.
- Two examples of irregular items are discontinued operations and extraordinary expenses.
- Discontinued operation is the most common type of irregular item.
- The earnings per share can appear on the income statement or in the notes to the income statement.
- Income tax is allocated to income from continuing operations before tax, discontinued operations and extraordinary items.