Income From Operations Formula

Income From Operations Formula (Table of Contents)

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What is the Income From Operations Formula?

The term “income from operations” refers to the profit generated from the core operations of the company and it does include any other income or expenses that are not directly related to the core business of the company. The income from an operation is also known as operating income of EBIT (earnings before interest and tax) The formula for income from the operation can be derived by subtracting the cost of goods sold and operating expenses from the revenue of the company. Mathematically, it is represented as,

There is an alternate formula for income from an operation and it can be derived by adding back interest expense and taxes to the net income which is adjusted for any non-operating activities. Mathematically, it is represented as,

Examples of Income From Operations Formula (With Excel Template)

Let’s take an example to understand the calculation of Income From Operations in a better manner.

Income From Operations Formula – Example #1

Let us take the example of ABC Ltd to understand the calculation of income from operations. As per the latest annual report published during the year 20XX, the company has managed to sell 50,000 lamps at $3 per piece. Further, the following information pertaining to the expenses is available:

Solution:

Revenue is calculated using the formula given below

Revenue = Number of Units Sold * Average Selling Price Per Unit

• Revenue = 50,000 * $3
• Revenue = $150,000

Operating Expenses is calculated using the formula given below

Operating Expenses = Administrative Expense + Depreciation Expense

• Operating Expenses = $15,000 + $20,000
• Operating Expenses = $35,000

Income From Operations is calculated using the formula given below

Income From Operations = Revenue – Cost of Goods Sold – Operating Expenses

• Income From Operations = $150,000 – $80,000 – $35,000
• Income From Operations = $35,000

Therefore, ABC Ltd managed income from operations of $35,000 during the year.

Income From Operations Formula – Example #2

Let us take the example of Apple Inc.’s to understand the alternate formula for income from the operation. As per the latest annual report, the following information is available:

Solution:

Net Income is calculated as:

The formula for income from the operation can be derived by using the following steps:

Step 1: Firstly, determine the revenue from the income statement of the company, which is the product of the number of units sold and the average selling price per unit.

Revenue = Number of Units Sold * Average Selling Price Per Unit

Step 2: Next, determine the cost of goods sold from the income statement, which is the cost of raw material used in the production of the units being sold. It can be computed by adding the purchase of raw material during the period and inventory at the beginning of the period minus inventory at the end of the period.

Cost of Goods Sold = Beginning Inventory + Purchase of Raw Material – Closing Inventory

Step 3: Next, determine the operating expenses from the income statement, which includes various direct and indirect costs such as administrative expenses, depreciation, labor cost, etc.

Step 4: Finally, the formula for income from the operation can be derived by subtracting the cost of goods sold (step 2) and operating expenses (step 3) from the revenue (step 1) as shown below.

Income from Operations = Revenue – Cost of Goods Sold – Operating Expenses

On the other hand, the formula for income from the operation can also be derived by using the following steps:

Step 1: Firstly, determine the net income of the company from the income statement. However, please ensure that any non-operating income has been subtracted from and any non-operating expense has been added back the net income to adjust for any activities other than the core operation of the company.

Step 2: Next, determine the interest expense from the income statement, which is the interest charged on the outstanding debt during the year.

Step 3: Next, determine the taxes paid during the period and it is available as a line item in the income statement.

Step 4: Finally, the formula for income from the operation can be derived by adding back interest expense (step 2) and taxes (step 3) to the net income (step 1) as shown below.

Income From Operations = Net Income + Interest Expense + Taxes

Relevance and Uses of Income from Operations Formula

The concept of income from an operation is very important because it is a profitability measure that assesses the operating performance of a company before the impact of financing cost and taxes. This profitability measure is usually used to compare the performance of different companies. However, it can only be for comparing companies in the same industry. Further, this profitability measure is expressed in terms of dollar amount and as such, some investors tend to avoid to use it fails to provide any meaningful insights when used to compare companies of different sizes (small & medium enterprise, mid-corporate and large corporate).

Income From Operations Formula Calculator

You can use the following Income From Operations Formula Calculator

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