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Operating Expns Vs Non-Operating Expns

Pandiri Ramu (Business Analyst) (613 Points)

30 July 2010

Dear Sir,

I need one Clarification regarding below mentioned topic. Generally I have noticed in the Books that while calculation Operating Profit , there are two methods :

1.Operating Profit = (Gross Profit + Operating Income) - (Operating Expns )

2. Operating Profit = (Net Profit + Non-operating Expns & Losses) - (Non-Operating Incomes & Gains )

So, could you please let me know whether I need to consider " Depreciation on Plant & Machinery" as Operating Expns/Losses or Non-Operating Expns/ Losses or not, to calculation correct amount of Operating Profit.

And Please let me know is there any difference between "Funds Generated from Business Operations" ( Not Cash Generated from Business Operations ) & Operating Profit. If so, what is that difference. Kindly clarify the same.

Many thanks in advance,

Ramu

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2 Replies

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 30 July 2010

Dear Ramu,

A very good query raised by you.

You have mentioned the formula for calculating operating profit correctly. Depreciation on P&M is an operating expense because P & M helps in day to day production(operation) of business. Moreover, remember one thing that it is a non cash operating expense. It is taken in calculation of operating profit.

Coming to your second question, Funds from operation(FFO) and Operating profit are two different things. FFO is the result of operating activities and its calculated by excluding non-cash operating exp. These items are merely book entries. In operating profit you consider both cash and non-cash operating items.

To be more clear. FFO does not include any items which is non- cash and non-operating. FFO purely analyses flow of your funds in working capital cycle and that is why non-cash items( like depreciation) do not form part of it.

We can say, FFO = N/P + Dep. + Non operating Exp. - Non operating Incomes

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Mayank (Sr.Accountant) (152 Points)
Replied 31 July 2010

Hi Ramu.

Operating exps are those which we made on daily basis for running the business.Depreciation on P&M is a part of operating exps. because when we use machinery or any other assets its value get reduced but we can not calculate it on daily basis so we use the term of depreciation and calculate it on year end basis. It is a non cash item so we will take it only for calculatinf operating profit not in the calculation of funds generated from business operation as it includes only cash movement because we want to know how much we earned or lost in form of cash.

byeeeeeeeeee