How is Operating Income determined?

Operating income is determined by subtracting operating expenses from gross profit. This calculation represents the income generated from core business operations before deducting interest and taxes. It reflects the effectiveness of a company's management in controlling costs and generating profits from its primary business activities.

Gross profit is calculated as net sales minus the cost of goods sold (COGS), which indicates the profit a company makes after deducting the costs associated with manufacturing or delivering its products and services. Once you have gross profit, you subtract operating expenses, which include both selling expenses and general and administrative expenses, to arrive at operating income. This figure is critical as it shows the profitability directly attributable to the company's operational performance, excluding other factors like non-operating income or expenses.

The other options do not accurately reflect how operating income is calculated:

• Simply adding operating expenses to gross profit or using net sales does not lead to the correct determination of operating income. Similarly, gross sales minus cost of goods sold would only give you gross profit, not operating income. Thus, understanding the structure of the income statement and the relationship between these elements is crucial in financial analysis and decision-making.