Operating Income/EBIT includes, disposal, another, revenue, someone

bcp901

Saw this in another thread - can someone clear this up?

Chuckrox8 Wrote:
-------------------------------------------------------
> jonly,
>
> as westibbs pointed out EBIT does not equal
> operating income. ebit is below operating income
> on the IS and includes non-operating items.
>
> operating income = revenue less expenses (sga,
> depr, amort, cogs)
>
> ebit = operating income +/- extraordinary
> items/non-operating items (i.e. gain/loss asset
> disposal)
>
> They test this time and time again.


My understanding is:

Revenue
-COGS
=Gross Profit
-SG&A
=Operating income before Depreciation
-Depreciation
=Operating Income after depreciation (EBIT)
-Interest
+/- special items and nonoperating items
=EBT
-Taxes
=Income from continuing operations
+/- one time gains and losses
=Net Income

Is the above correct?

President1988

yea westibbs is correct.

Operating profit is the profit generated from operating activities.

EBIT includes income generated from nonoperating activities.

In your example you would move the nonoperating items to after operating profit and before EBIT.

Otabek

Could you point me to where this is in the material? Thanks!



Edited 1 time(s). Last edit at Wednesday, May 25, 2011 at 08:13PM by ftwcfa.

redskins44

No that is wrong. CFAI clearly states that operating income is EBIT.

"Operating income reflects a company's profits from its usual business activities, before deducting interest expenses or taxes"

Source is CFAI 2008 FSA Volume 3 level 1 page 13


Be careful of what people tell you on the forum...they often as as confused as you...that goes for me too!



Edited 1 time(s). Last edit at Wednesday, May 25, 2011 at 08:41PM by Thecodont.

ninja1024

Thecodont Wrote:
-------------------------------------------------------
> No that is wrong. CFAI clearly states that
> operating income is EBIT.
>
> "Operating income reflects the a company's profits
> from its usual business activities, before
> deducting interest expenses or taxes"
>
> Source is CFAI 2008 FSA Volume 3 level 1 page 13
>
>
> Because of what people tell you on the
> forum...they often as as confused as you...that
> goes for me too!

Sorry bro, but you are actually wrong. The CFAI never ever states that operating income and EBIT are the same thing. (Find that in the text) They do use the two terms interchangeably throughout the text. If a company had no non-ordinary items then yes, EBIT and Operating Income would be the same, but that is rarely the case.

"Operating income reflects the a company's profits from its usual business activities, before deducting interest expenses or taxes"

Note the key word USUAL. Operating Income/Profit only includes USUAL business income and expenses. EBIT is one line down and includes unusual/non-ordinary gains or expenses. Maybe you should have a little more faith in the forum.



Edited 2 time(s). Last edit at Wednesday, May 25, 2011 at 08:47PM by Chuckrox8.

spreads

Page 164 in Schweser also says "EBIT is often referred to as operating income, or operating profit"

Could someone point to a problem or a paragraph in the material where you have to adjust non-operating expenses out of EBIT to get back to operating income?

defour44

Chuckrox8 Wrote:
-------------------------------------------------------
> Thecodont Wrote:
> --------------------------------------------------
> -----
> > No that is wrong. CFAI clearly states that
> > operating income is EBIT.
> >
> > "Operating income reflects the a company's
> profits
> > from its usual business activities, before
> > deducting interest expenses or taxes"
> >
> > Source is CFAI 2008 FSA Volume 3 level 1 page
> 13
> >
> >
> > Because of what people tell you on the
> > forum...they often as as confused as you...that
> > goes for me too!
>
> Sorry bro, but you are actually wrong. The CFAI
> never ever states that operating income and EBIT
> are the same thing. (Find that in the text) They
> do use the two terms interchangeably throughout
> the text. If a company had no non-ordinary items
> then yes, EBIT and Operating Income would be the
> same, but that is rarely the case.
>
> "Operating income reflects the a company's profits
> from its usual business activities, before
> deducting interest expenses or taxes"
>
> Note the key word USUAL. Operating Income/Profit
> only includes USUAL business income and expenses.
> EBIT is one line down and includes
> unusual/non-ordinary gains or expenses. Maybe you
> should have a little more faith in the forum.


I think you are getting confused. The CFAI says that you need to adjust EBIT for non-reoccurring items NOT non operating items as you suggest here

"EBIT includes income generated from nonoperating activities. "

Further CFAI 2008 FSA Volume 3 level 1 page 170 says
" Nonoperating items are reported separately from operating income"

flyinggirl

Until proven otherwise, I agree with you Thecondont. I believe non-operating items, and one time gains and losses are reported between EBIT and EBT, then you pay taxes on them.