Cost of Goods Sold

Cost of goods sold are the direct costs of producing the goods being offered by the entity. This would include the materials, labor, and other resources required for production.

Gross Profit

Gross profit is the difference between the revenue received for the product less the cost of goods sold.

Operating Expenses

Operating expenses are the amount an entity expends to maintain and operate the general business. Operating expenses include research and development, marketing, general and administrative, amortization of intangible assets (i.e. patents, good will, etc.), etc.

In addition, when an entity purchases a capital asset, such as a building or equipment, they expense a portion of the asset over a number of years; this is called depreciation. Depreciation expense is an accounting expense that is deducted from net income.

Operating Income

Operating income is equal to revenues minus cost of goods sold and operating expenses. In other words, it measures the profits or losses of the day to day operations of the business. Another name for Operating Income is Earnings Before Interest and Taxes (EBIT).

Related Reading: What is Operating Cash Flow?

Other Income/Expenses

To obtain net income, further adjustments must be made to account for interest income and expense, income tax expenses, and other extraordinary and miscellaneous items.

Profits

Revenues minus all expenses equals net income (profits or losses). Profits are also referred to as net income or the “bottom line” because profits are reported at the bottom of the income statement. Some analysts call these “accounting profits” because they include non-cash accounting entries such as depreciation and amortization.