What is Income from Operations?
Income from operations is income that is generated by the normal operations of a business.
How Does Income from Operations Work?
Income from operations is also referred to as operating income or operating earnings.
According to the Accounting Principles Board (APB) 30, income from operations does not include any items such as extraordinary items, changes in accounting principle, results of discontinued operations, or gains or losses from disposals of segments of operations. For example, in Company XYZ's income statement:
For the year ended Dec 31, 2xxx
| Sales Revenue | $1,000,000 |
| Cost of Goods Sold | $550,000 |
| Operating Expenses | $170,000 |
| Administrative Expenses | $100,000 |
| Income from Operations Before Income Taxes | $180,000 |
| Income Tax Expense | $10,000 |
| Income From Continuing Operations | $170,000 |
| Income From Operations of Discontinued Segment (Net of Taxes) | $20,000 |
| Extraordinary Gain | $10,000 |
| Net Income | $200,000 |
In the above example, operating income is stated in the item called ‘income from continuing operations’ which equals $170,000. The example also shows how net income ($200,000) is at times greater than operating income ($170,000) due to other items, in this case income from discontinued operations ($20,000) and extraordinary gain ($10,000).
Why Does Income from Operations Matter?
For analysts and creditors analyzing the income statement of a particular company it is essential to recognize the differences between income from continuing operations and other non-recurring items. Income from operations is generally considered the best barometer of future results. Other items, which are non-recurring, are less essential for projecting future income.
