What is Income From Operations?

Income From Operations

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Income From Operations

Income from operations, also known as operating income or operating profit, is a measure of the profit a company generates from its core business operations, before subtracting interest and taxes. It does not include profits earned from non-operating activities, such as investments or sales of assets.

You can calculate income from operations using the following formula:

Operating Income = Gross Income – Operating Expenses – Depreciation – Amortization

Here’s what these terms mean:

Operating income is a valuable measure of a company’s profitability because it focuses on the profits that the company is able to generate from its core business operations, excluding more variable factors like interest costs, tax expenses, or one-time items. This can make it a more consistent and reliable indicator of the company’s ongoing profitability.

Example of Income From Operations

Let’s consider an example of a fictional manufacturing company named ABC Corp.

Let’s say in the fiscal year 2023, ABC Corp has:

  • Revenue (sales) of $5,000,000
  • Cost of Goods Sold (COGS) of $2,000,000
  • Operating expenses (like rent, salaries, and utilities) of $1,000,000
  • Depreciation of $200,000
  • Amortization of $100,000

First, we need to calculate the gross income, which is Revenue – COGS:

$5,000,000 (Revenue) – $2,000,000 (COGS) = $3,000,000 (Gross Income)

Then, we subtract operating expenses, depreciation, and amortization from the gross income to get the income from operations:

$3,000,000 (Gross Income) – $1,000,000 (Operating Expenses) – $200,000 (Depreciation) – $100,000 (Amortization) = $1,700,000 (Operating Income)

So, ABC Corp’s income from operations for the fiscal year 2023 is $1,700,000. This is the profit that ABC Corp generated from its core business operations, before subtracting interest and taxes.

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