Definition of Operating Income
Operating income is the residual of sales revenue after deducting direct and direct expenses. The direct costs include the cost of goods sold. When we deduct the cost of goods sold from sales revenues we get gross profit or gross margin. From this, we then deduct indirect expenses like depreciation, amortization, selling, and administrative expenses and adjust them with all other operating revenues if any. Adding all these net expenses collectively are called operating expenses.
When these operating expenses are deducted from the gross profit the residual is called operating income. This is also known as EBIT as it does not take effect of any interest payments and taxation. Let’s see an income statement example to understand how the operating income is calculated.