In the realm of financial reporting, the terms “operating income” and “income from continuing operations” often arise. While these terms may seem interchangeable, there are subtle distinctions between them that warrant clarification. This article delves into the definitions, inclusions, calculations, and relationships of these two income categories, drawing upon reputable sources such as Investopedia, Chron.com, and FreshBooks.
Key Facts
- Definition:
- Operating income: It is a category of net income found on the income statement that accounts for a company’s regular business activities.
- Income from continuing operations: It refers to the earnings of a business after deducting expenses, specifically from its primary business activities.
- Inclusion of irregular items:
- Operating income: It excludes irregular revenue and expenses, such as gains or losses from the sale of assets or business property.
- Income from continuing operations: It only includes revenue generated from regular business activities and excludes unusual or non-recurring items.
- Calculation:
- Operating income: It is calculated by subtracting the cost of goods sold and other operating expenses from the revenue earned from day-to-day operations.
- Income from continuing operations: It is calculated by deducting expenses from the revenue generated from primary business activities.
- Relationship to net income:
- Operating income: It is a component of net income, but net income includes income from continuing operations as well as unusual and irregular income and income from discontinued operations.
- Income from continuing operations: It is a subset of net income, focusing solely on the revenue generated from regular business activities.
Definitions
Operating Income
Operating income, also known as income from operations, is a category of net income found on the income statement that specifically accounts for a company’s regular business activities. It represents the earnings generated from the core operations of a business, excluding non-operating income and expenses.
Income from Continuing Operations
Income from continuing operations refers to the earnings of a business after deducting expenses, specifically from its primary business activities. This category focuses on the revenue generated from the ongoing and regular operations of the business, excluding discontinued operations and irregular income or expenses.
Inclusion of Irregular Items
Operating Income
Operating income excludes irregular revenue and expenses, such as gains or losses from the sale of assets or business property. These items are considered non-operating and are reported separately on the income statement.
Income from Continuing Operations
Income from continuing operations only includes revenue generated from regular business activities and excludes unusual or non-recurring items. This ensures that the income reported in this category is representative of the core business operations.
Calculation
Operating Income
Operating income is calculated by subtracting the cost of goods sold and other operating expenses from the revenue earned from day-to-day operations. This calculation provides a clear picture of the profitability of the company’s core business activities.
Income from Continuing Operations
Income from continuing operations is calculated by deducting expenses from the revenue generated from primary business activities. This calculation focuses solely on the earnings from the ongoing operations of the business, excluding discontinued operations and irregular items.
Relationship to Net Income
Operating Income
Operating income is a component of net income, but net income includes income from continuing operations as well as unusual and irregular income and income from discontinued operations. Net income represents the overall profitability of the business, considering all sources of revenue and expenses.
Income from Continuing Operations
Income from continuing operations is a subset of net income, focusing solely on the revenue generated from regular business activities. It provides insights into the core profitability of the business, excluding non-recurring items and discontinued operations.
Conclusion
Operating income and income from continuing operations are distinct categories of net income that provide valuable insights into a company’s financial performance. Operating income measures the profitability of the core business activities, while income from continuing operations focuses on the earnings from ongoing operations, excluding irregular items and discontinued operations. Understanding these distinctions is crucial for financial analysts, investors, and stakeholders in assessing a company’s financial health and performance.
References
- Investopedia: Income From Continuing Operations Defined and Explained (https://www.investopedia.com/terms/c/continuingoperations.asp)
- Chron.com: Is Income From Operations the Same Thing as Operating Income? (https://smallbusiness.chron.com/income-operations-same-thing-operating-income-80026.html)
- FreshBooks: Continuing Operations: What Are Continuing Operations of a Business? (https://www.freshbooks.com/hub/accounting/continuing-operations)
FAQs
What is operating income?
Answer: Operating income, also known as income from operations, is a category of net income that represents the earnings generated from a company’s regular business activities, excluding non-operating income and expenses.
What is income from continuing operations?
Answer: Income from continuing operations refers to the earnings of a business after deducting expenses, specifically from its primary business activities. It focuses on the revenue generated from ongoing and regular operations, excluding discontinued operations and irregular income or expenses.
How is operating income calculated?
Answer: Operating income is calculated by subtracting the cost of goods sold and other operating expenses from the revenue earned from day-to-day operations.
How is income from continuing operations calculated?
Answer: Income from continuing operations is calculated by deducting expenses from the revenue generated from primary business activities, excluding discontinued operations and irregular items.
What is the difference between operating income and income from continuing operations?
Answer: Operating income includes all revenue and expenses from regular business activities, while income from continuing operations excludes irregular items and discontinued operations.
Why is income from continuing operations important?
Answer: Income from continuing operations provides insights into the core profitability of a business, excluding non-recurring items and discontinued operations. It helps analysts and investors assess the ongoing performance of the business.
How are operating income and income from continuing operations related to net income?
Answer: Operating income is a component of net income, which also includes irregular income, discontinued operations, and non-operating income and expenses. Income from continuing operations is a subset of net income, focusing solely on the earnings from regular business activities.
Which income category is more important for evaluating a company’s core business performance?
Answer: Income from continuing operations is more important for evaluating a company’s core business performance because it excludes irregular items and discontinued operations, providing a clearer picture of the ongoing profitability of the business.