What formula represents the calculation of Operating Income (EBIT)?

What formula represents the calculation of Operating Income (EBIT)?

• A. Gross Profit - Net Income
• B. Revenue - Cost of Goods Sold - Operating Expenses
• C. Gross Profit - Non-operating Expenses
• D. Revenue - Taxes

Answer: (B)

The calculation of Operating Income, often referred to as EBIT (Earnings Before Interest and Taxes), is fundamentally based on the company’s revenue and its direct costs related to running its core business. The formula that accurately captures this is the one that subtracts both the Cost of Goods Sold (COGS) and operating expenses from total revenue. By taking total revenue and deducting the cost of goods sold, you arrive at gross profit. Following that, subtracting operating expenses provides a clear view of the earnings before interest and taxes, which is the operational performance of the business. This approach effectively highlights the profitability of the company's core operations, independent of non-operational factors like taxes and interest expenses. The other options do not correctly represent the calculation of Operating Income. For instance, simply subtracting net income from gross profit does not account for operating expenses, nor does it accurately reflect operational performance. Similarly, removing non-operating expenses from gross profit misses other critical elements that are necessary for calculating operating income. Lastly, subtracting taxes directly from revenue is unrelated to operating income as it does not consider costs or expenses associated with running the operations. Therefore, the correct formulation is the one that encompasses the necessary components of revenue, COGS, and operating expenses.

The calculation of Operating Income, often referred to as EBIT (Earnings Before Interest and Taxes), is fundamentally based on the company’s revenue and its direct costs related to running its core business. The formula that accurately captures this is the one that subtracts both the Cost of Goods Sold (COGS) and operating expenses from total revenue.

By taking total revenue and deducting the cost of goods sold, you arrive at gross profit. Following that, subtracting operating expenses provides a clear view of the earnings before interest and taxes, which is the operational performance of the business. This approach effectively highlights the profitability of the company's core operations, independent of non-operational factors like taxes and interest expenses.

The other options do not correctly represent the calculation of Operating Income. For instance, simply subtracting net income from gross profit does not account for operating expenses, nor does it accurately reflect operational performance. Similarly, removing non-operating expenses from gross profit misses other critical elements that are necessary for calculating operating income. Lastly, subtracting taxes directly from revenue is unrelated to operating income as it does not consider costs or expenses associated with running the operations. Therefore, the correct formulation is the one that encompasses the necessary components of revenue, COGS, and operating expenses.