Final answer:
The equation calculates Net Income, which is derived from adjusting operating income for various non-operating items like interest and other gains or losses. It provides a clear financial performance picture and is influenced by total revenue.
Step-by-step explanation:
The equation Operating Income ± Other items (Interest income or expense, Other gains or losses, sales discounts forfeited) equals Net Income. In accounting, operating income reflects a company's profit after deducting operating expenses like wages and cost of goods sold.
When you adjust operating income for other items like interest income/expense and other non-operating gains or losses, you arrive at the net income, which provides a more comprehensive view of a company's financial performance. Total revenue plays a critical role in this calculation by representing the initial income before any costs are deducted.
For example, if a company has an operating income of $120,000, interest expenses of $10,000, and other gains of $5,000, the Net Income would be calculated as $120,000 (operating income) - $10,000 (interest expense) + $5,000 (other gains) = $115,000.