Calculating Operating Income

A business's operating income indicates how expensive it is to maintain business operations and produce a certain amount of profit. The calculation can be used for both large and small businesses that want to measure the overall health of business operations, and the total is derived from the totals on various financial statements. Here's how to calculate operating income.

Difficulty: Moderate

Instructions

1. Determine the gross profit. This information can be found in the income statement,and should include all revenue generated from the business over a set period of time. It is calculated by subtracting the cost of goods sold from net sales.

2. Calculate total operating expenses. This information can be found in the balance sheet,and should include expenses such as advertising, office and supplies expenses, license fees, insurance and vehicle expenses.

3. Subtract operating expenses from gross profit. This is the total operating income for this period.

4. Post this information in the income statement. The operating income is posted directly below the Operating Revenues and Operating Expenses section of the income statement and the value of Earnings before interest and income taxes (EBIT) is derived from this final calculation.

Tips & Warnings

• The operating income calculation is necessary for calculating the operating margin, EBIT and other accounting calculations.