operating income does not include interest/taxes?

[caynonero]

hi guys, on p. 211 in schweser book 2 about integration of financial statement analysis technique it says how operating cf would include interest and taxes while operating income would not. assuming there’s no nonoperating income which makes operating income=EBIT, how can I AND T not be included?!? thanks

 

[chad.sandstedt]

Interest and taxes are not operating activities so they are deducting after operating income on and income statement. Here is a typical format:
Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Operating Income (EBIT)
Interest Expense
Other Expense (Income)
Earnings Before Taxes
Income Taxes
Net Income
The goal here is to take any financing or taxation differences out of the equation for comparison purposes. For example, when comparing companies in different countries (i.e. different tax rates) and different capital structures (i.e. different interest expense) you would want to look at operating income, not EBT.

 

[caynonero]

thanks.
i was familiar with the income stmt breakdown or at least thought so…
maybe i’m somewhat slow in the uptake but isn’t operating income = Earnings Before Interest & Taxes (deduction)? hence, how can interest not be included in operating income, if it’s not yet been deducted?

 

[chad.sandstedt]

I don’t understand what you mean with “included”. Interest cannot be included in operating income, it can only be deducted from operating income.

 

[BMiller12]

I think I understand your confusion. It is somewhat confusing when they say that interest and taxes are “excluded” or “not included” in operating income. One would tend to think this means they have been removed since they are “not included”, when indeed it means the opposite - they have not been removed therefore they are not included. To say they are “not included” is another way of saying they haven’t even been considered yet, and are therefore excluded from operating income.
Don’t get ahead of yourself when thinking about the income stmt. We all know that taxes and and interest are considered after arriving at operating income, but pretend for a second like you don’t. If you’re sitting at opt income, no provision for interest or taxes has been considered or incorporated and therefore they are not included. Only after they have been imputed have those expenses been included.
Again, kind of opposite thinking
included = been considered or subtracted out
not included = not considered, not subtracted out, excluded
Hope that makes sense!!! I tried

 

[BMiller12]

Don’t think of “included” as: well, those expenses are still in there bc they haven’t been subtracted yet. They become “included” once they have been subtracted. Prior to that, they are not included bc, remember, you’re not to that point yet.