Continuing Operations: What Are Continuing Operations of a Business?

This is why many investors consider operating income to be a more reliable measure of profits than net income, or “bottom line” profits. There are several alternative ways to calculate operating income, depending on which inputs are available and what you’d like to determine from your calculation. It is recorded after deducting depreciation, amortization, and the cost of goods sold. Operating income is also known as operating profit, and is sometimes referred to as EBIT, or Earnings Before Interest and Taxes.

Operating Profit FAQs

Under the indirect method, the figures required for the calculation are obtained from information in the company’s profit and loss account and balance sheet. Using the indirect method, calculate net cash flow from operating activities (CFO) from the following information. Operating income also does not include money earned from investments in other companies or nonoperating income. Also excluded are any special or nonrecurring items, such as acquisition expenses, proceeds from the sale of a property, or cash paid for a lawsuit settlement. Revenue is the total amount of income a company generates from the sale of goods and services. It is the sum generated before deducting any expenses, such as those involved in running the business.

When examining accounting statements, looking at income from operations can provide important data about how healthy a company is and how well it is doing in the long term. If this number starts to fall, it can suggest that operating expenses are rising or sales are falling and the company is not compensating. Steady numbers show that a company is operating at a profit but not expanding and that it may not be keeping pace with the rest of the industry. The cost accounting approach calculates operating income by analysing the internal tracking of costs. However, this method does not enable operating income comparisons between companies, as the top-down method does, due to the potential for different direct and indirect cost classifications.

Cost of Goods Sold

• Changes in operating income can directly affect a company’s profitability and financial position.
• Assume ABC Company recorded sales revenue worth $400,000 in the previous month.
• Because this is income generated only from normal operations, an investor could assume that similar income will be generated every year as long as operations continue.

To maintain operations, companies are sometimes compelled to reduce expenses or incur debt. However, diminishing revenues will eventually result what is income from operations in a decline in operating earnings. On the other hand, declining revenues and lacklustre sales exert downward pressure on operating income.

Is Income from Continuing Operations the Same as Net Income?

The value generated has to be sufficient to meet the costs of various expenses and provide support for further expansion and development. This will be possible only if the quality of the revenue generated is sustainable. Such revenues will bring value to the entity and are the result of a successful business model. Any business model which does not generate sustainable growth is likely to fail and therefore, analysis of revenue from operations is crucial for overall analysis of financial statement. To calculate income from operations, companies start by looking at the total sales revenue from a given accounting period. This yields the total profit made from operations within that accounting period.

Operating income is also used to look at operating margins, as this is usually an easier way to compare performance YoY or versus competitors. EBIT is calculated by taking the net income and adding back taxes and interest. Furthermore, there’s usually an industry average, which is helpful in calibrating company performance and determining whether the profit generated at each stage is reasonable.

If it increases, it means that the company is making more money from its core business. All items needed to calculate operating income, as well as operating income itself, are included. The cost of revenue is shown, rather than COGS, since this is a service company.

However, operating income does not include items such as other income, non-operating income, and non-operating expenses. Operating income is an accounting figure that measures the amount of profit realized from a business’s operations after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS). Operating profit was $535,000 for the period, calculated by taking the gross profit of $700,000 minus operating expenses and depreciation and amortization of $15,000 (labeled as total expenses).

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.