Arizona State University (ASU) ACC232 Financial Accounting I Exam 2 Practice

Operating income is calculated as the revenue from a company's main business activities minus the expenses incurred to generate that revenue. This includes costs such as cost of goods sold and operating expenses like selling, general, and administrative expenses. However, there are certain types of income and expenses that are not considered when calculating operating income.

Income derived from investments and non-operating activities is excluded from the calculation of operating income because it does not stem from the core operations of the business. For example, interest income, gains from the sale of investment securities, or income from rental properties would fall into this category. These sources of income are typically reported separately in the income statement, usually under non-operating income. Including them would misrepresent the true performance and efficiency of the company's primary operations, which is what operating income aims to measure.

Therefore, excluding income derived from investments and non-operating activities ensures that the operating income reflects only the profitability associated with the core business activities, providing a clearer picture of operational performance.