Explanation :The income statement of any organization is directly impacted by two major factors: revenues and expenses. Revenue is generated from the sale of products, while expenses are generated by the funding of operational activities. In general, when the gross profit of an organization (sales – cost of sales) exceeds the operating expenses (including depreciation and amortization), the organization is said to have generated income from operations. In the case of for-profit, public companies, the EBIT is a critical financial statement figure.Income from operations is a benchmark used by financial statement users to determine the competency of management and the efficiency of the company’s operations. While many external factors can influence the sales revenue of an organization, the changes in EBIT highlight management’s ability to effectively react to the external forces.
In a nutshell :
- Operating income reports the amount of profit realized from a business's ongoing operations.
- Operating income is calculated by subtracting operating expenses from a company's gross income.
- Analyzing operating income is useful because it doesn't include one-off items such as taxes that may skew a company's profit in a given year.