in the book, it says: (earnings before interests and tax) = (operating profit) but it seems like EBIT also includes non-operating incomes suchs as interest income. then, how do we know if EBIT = (operating profit) or EBIT = [(operating profit) + (other income)]? thanks.
As far as i know interest income is considered operating income as well look at cfo, cff and cfi
interest income is included in cash flor from operations but it is not included in operating profit. operating profit = net sales - cost of goods sold - sg&a expense the book says this operating profit is equal to EBIT but when calculating some ratios such as fixed financial cost coverage.
you are right ebit is before you deduct interest expense how do you know that ebit includes interest income?
florinpop Wrote: ------------------------------------------------------- […] > how do you know that ebit includes interest > income? I suggest you commit to memory what an income staement looks like. This is absolutely crucial, do it NOW. You should know what includes what, what goes above what, etc like the back of your hand.
ok I applologise for writing without knowing for sure but the way Schwester describes it you have sales-COGS-Operating Expense = Operating income =EBIT) if you add +/- Other revenue and expenses =Income before income taxes =EAT They include Interest income and Interest taxes into the Other revenue and Expenses Therefore interest income/expense is not a part of EBIT but a part of EAT ?
Lola I appreciate your advice but you could have helped with an answer too
florinpop, if you knew what an income statement looks like, you wouldn’t be asking this. Learning what I suggested will help you with this question and many, many more. So what is EBIT? It stands for earnings BEFORE taxes and interest expense. That right there tells you that at this stage you have not subtracted interest and taxes, i.e. EBIT includes interest and taxes. Not sure how to spell it out more clearly. I think you’re confused because you’re thinking backwards about this. Take it from the top (Net Sales) and start subtracting the different components. When you say that a certain income is before something, it means that this is the income before the expense is actually subtracted. Let me know if you still need help with this.
I also looked at the book and figured it out. So, EBIT is operating profit. However, when you use EBIT to calculate financial ratios, since incomes from non-operations is still your income it looks like you add those non-operational incomes such as interest income to your operation profit (EBIT) to represent your actual earnings before interest and taxes. Please correct me if I am wrong.
lola is clear now just that i was confused, for some reason i thought that ebit had interest income incorporated but had not interest expense deducted yet