Operating Income - calculation method? income, method, example, material, only

segalm

Hi,

I have seen two ways to calculate operating income from Income Statement.

For example, firm A only has expenses items: COGS, SG&A Expenses, R&D Expenses and Depreciation Expenese in Income Statement.

Method #1: Sales - COGS - SG&A Expenses - R&D Expenses = Operating Income
Method #2: Sales - COGS - SG&A Expenses - R&D Expenses - Depreciation = Operating Income (Also is known as EBIT)


Do you know which method is appropriate according to CFAI material?

Thanks.

tobeornottobe

Method #2 since operating profit = EBIT.

Depreciation is accounted for before operating profit because fixed assets are part of your core operations.

genuinecfa

Think it depends.

If you are conducting credit analysis the correct method is Method #1.

See Reading 53, p.198

maryli

Method 1 gives you core operating income.

Method 2 gives you operating income.

senlinlang

perimel - you are correct.

Non-cash charges are not taken into account for the purposes of credit analysis - use EBITDA (method #1) in this case. For all others, method #2 will suffice.

stalkey

This is one of the many "discrepancies" found in Level 2 and the only way to spot them is by practice or by luck!

Otabek

Thanks for explanation. You guys really know more than I do!