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Balance sheets play an important role in numerous sectors of the finance industry, including economics, accounting and investing. Two important terms that relate to balance sheets and analysis of financial statements that are often misunderstood or misused by the general public are revenue and operating income.

Revenue is the top line of a balance sheet. It reflects all cash that flows into the company from its primary operations. This includes sales of goods and services, less any deductions for returns or discounts, before any applicable taxes or interest. While often confused with profit, revenue is actually the gross income from sales from which profit can be derived. To calculate net profit , all payments, taxes, debts and other expenses are deducted and any additional income from investments, earnings interest or secondary operations is added.

Operating income, on the other hand, requires a little more calculation. Also called operating profit or recurring profit, operating income is derived from the revenue figure and reflects net profit after accounting for operational expenses. However, this is not the same thing as the bottom line profit. Operating profit only reduces revenue by the amount of money required to pay for running the business. This includes items such as the cost of goods sold (COGS), freight expenses, rent, heating, office supplies, advertising and payroll. Operating income does not include any of the taxes, loan repayment or interest, or single-occurrence events that required payout, such as lawsuits. Once these items are accounted for, the result is the company's net profit.

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