Operating RevenueExplained & Defined
What is Operating Revenue?
Operating Revenue is the income generated from a business’s primary business operation.
The operating revenue generated will depend on the type of industry the business falls under.
For service industries, the primary business revenue will come from the services rendered. For manufacturing companies, it will be from the sale of their products.
Understanding Operating Revenue
To evaluate business performance through its primary generating income, users of the financial information must distinguish an operating revenue from the total revenue.
Accounting standards state that operating revenues are to be separately recognized and reported from the secondary or non-operating income.
However, other companies try to conceal and transfer some amounts from the non-operating income to the operating income to show a healthy operating revenue amount.
Users of financial information must pay attention to the income sources of a company to properly assess the overall financial health of the firm and the efficiency of its operations.
Operating Revenue vs. Non-Operating Revenue
Non-operating revenue comes from activities other than the company’s primary business activity.
Some are a form of passive income like dividends received from an investment or interest income. Some non-operating revenues are from non-operating activities like gains from disposing of an old asset, etc.
If a school’s primary generating income is from tuition fees, a donation received is classified as non-operating revenue because a gift or donation is not the primary registered activity of a University – it is infrequent and unusual in occurrence.
When the Income Statements are prepared, the operating revenue is first calculated to determine the operating profit.
The non-operating income items such as donations of gifts will then be presented separately after. This manner of reporting allows users of the information to receive a more relevant financial information.
Non-operating revenues may change from every accounting period – it is essential to determine the amounts across different periods to create a comparable analysis because it can change from year to year.
Special Considerations
Cash Flow
Non-operating income does not regularly contribute to the cash inflow of the company, which requires operating and non-operating income amounts to be on a separate line item in the Income Statement.
A company funds its operations through its primary business operations and the management may not need to seek funds through external sources if they constantly achieve a high operating revenue.
For example, a company sold its idle land and generated gain from the activity and shall be recorded as a non-operating income.
While non-operating revenue provides additional funds to the company, it is not the regular income-generating unit of the company and therefore, the basis of evaluation of the company’s financial status will not come from those types of income.
Stock Prices
The basis of the Earnings Per Share (EPS) computation of a company comes from its operating revenue and income.
The company’s stock price is evaluated based on this ratio.
The EPS describes the profitability rate of the company. It is computed by dividing the net income from outstanding common stocks.
A well-planned business strategy can increase the income or operating revenue of a company.
This will attract many customers and investors, which can result in an increase in the EPS and the stocks to be more valuable.
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Cornell University "Revenue Classification" Page 1 . August 23, 2022