what is operating income 
operating income is an accounting figure that measures the amount of profit realized from a business s operations after deducting operating expenses such as wages depreciation and cost of goods sold cogs operating income also called income from operations takes a company s gross income which is equivalent to total revenue minus cogs and subtracts all operating expenses a business s operating expenses are costs incurred from normal operating activities and include items such as office supplies and utilities investopedia julie bangunderstanding operating incomeoperating income is a measurement that shows how much of a company s revenue will eventually become profits considering its business operations it s a measurement of what money a company makes only looking at the strictly operational aspect of its company operating income factors in two major types of expenses cost of goods sold and operating expenses cost of goods sold are the expenses directly related to the manufacturing of a good and often include labor raw materials and overhead allocated to items sold operating expenses include the selling administrative and general expenses prior to taxes and interest expenses analyzing operating income is helpful to investors because it doesn t include taxes and other one off items that might skew profit or net income a company that s generating an increasing amount of operating income is seen as favorable because it means that the company s management is generating more revenue while controlling expenses production costs and overhead because operating income deducts less expenses than net income it is usually a higher calculated amount operating income formulas and calculationsoperating income can be calculated in three different ways one approach is top down one approach is a bottom up approach and one leverages cost accounting classifications the formula for operating income using the top down approach is operating income gp oe d a where gp gross profit oe operating expenses d depreciation a amortization begin aligned text operating income text gp text oe text d text a textbf where text gp text gross profit text oe text operating expenses text d text depreciation text a text amortization end aligned operating income gp oe d awhere gp gross profitoe operating expensesd depreciationa amortization gross profit is the net profit earned after the cost of goods sold is subtracted from net revenue operating expenses are the selling administrative and general expenses necessary to operate a business though this does not include interest or taxes because operating expenses do not incorporate allocated costs depreciation and amortization must also be subtracted instead of starting with revenue you can also calculate operating income if you know net income because net income is calculated by subtracting a few items from operating income you can add them back in to arrive at operating income operating income ni ie te where ni net income ie interest expense te tax expense begin aligned text operating income text ni text ie text te textbf where text ni text net income text ie text interest expense text te text tax expense end aligned operating income ni ie tewhere ni net incomeie interest expensete tax expense in this formula you must have a fully calculated income statement as net income is the bottom and last component of the financial statements in this case the company may already be reporting operating income towards the bottom of the report though direct costs and indirect costs are not widely used in financial accounting a company may classify these types of expenses for internal use if a company does so it can find operating income by simply subtracting all of these costs from net revenue as taxes and interest are often not classified as either operating income nr dc ic where nr net revenue dc direct costs ic indirect costs begin aligned text operating income text nr text dc text ic textbf where text nr text net revenue text dc text direct costs text ic text indirect costs end aligned operating income nr dc icwhere nr net revenuedc direct costsic indirect costs in this formula net revenue is used in case there have been product returns or other deductions to make to gross revenue operating income is the amount of income a company generates from its core operations meaning it excludes any income and expenses not directly tied to the core business operating income vs other financial calculations