Principles of Finance

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Net income

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Principles of Finance

Definition

Net income is the profit a company retains after deducting all expenses, including taxes and interest, from its total revenue. It is often referred to as the bottom line and indicates the company's profitability during a specific period.

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5 Must Know Facts For Your Next Test

  1. Net income is calculated using the formula: Net Income = Total Revenue - Total Expenses.
  2. It appears at the bottom of the income statement, making it a key indicator of financial performance.
  3. Net income can be affected by both operational activities (like sales and production costs) and non-operational activities (like taxes and interest).
  4. In accrual accounting, net income includes revenues earned and expenses incurred during the period, regardless of when cash transactions occur.
  5. A positive net income indicates profitability, while a negative net income signifies a loss.

Review Questions

  • How do you calculate net income from an income statement?
  • Where on the financial statements can you find net income?
  • What are two types of activities that can affect net income?
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