Question

Which of the following is a correct definition of operating income?

a) sales minus variable expenses.
b) sales minus variable expenses and traceable fixed expenses.
c) contribution margin minus traceable and common fixed expenses.
d) income before interest and taxes (ebit).

Answer 1

Operating income, or EBIT, is the profit a company makes from its primary business operations, excluding interest and taxes. It includes all operational revenues and deducts expenses such as COGS, wages, and depreciation. It is a key indicator of a company's profitability from its core activities.

Step-by-step explanation:

The correct definition of operating income is reflected in option (d): income before interest and taxes (EBIT). This measures a company's profit before deducting interest charges and tax expenses. It includes all revenues from operations, minus operating expenses, such as the cost of goods sold (COGS), wages, and depreciation, excluding expenses and incomes from non-operating activities such as interest or investments.

Accounting profit is the concept of total revenues minus explicit costs, including depreciation. It represents the actual cash difference between revenues and the explicit costs a firm pays out. In business accounting, operating income is an essential component in understanding a firm's profitability from its primary business activities.

It is different from net income, which includes all other incomes and expenses like taxes and interest, and from gross profit, which is sales minus cost of goods sold only.