Net income

Net income is a key concept in accounting and finance, representing the amount of total revenues that exceed total expenses. It is often referred to as the "bottom line" because it is typically found on the last line of a company's income statement.

Definition

Net income is calculated by subtracting total expenses from total revenues. This includes all forms of revenue and income, such as sales revenue, interest income, and income from investments, and all forms of expenses, such as cost of goods sold (COGS), operating expenses, interest expenses, and taxes.

Importance

Net income is an important measure of a company's profitability and financial performance. It is used by various stakeholders, including investors, creditors, and management, to assess the company's financial health and make decisions. For example, investors may use net income to evaluate the company's profitability and determine whether to invest in the company. Creditors may use it to assess the company's ability to repay its debts. Management may use it to evaluate the company's performance and make strategic decisions.

Calculation

The formula for calculating net income is:

Net Income = Total Revenues - Total Expenses

Total revenues include all income earned by the company, such as sales revenue, interest income, and income from investments. Total expenses include all costs incurred by the company, such as cost of goods sold (COGS), operating expenses, interest expenses, and taxes.

Limitations

While net income is a useful measure of a company's profitability, it has several limitations. For example, it does not account for cash flows, which can be a more accurate indicator of a company's financial health. It also does not account for non-cash items, such as depreciation and amortization, which can distort the company's true profitability. Furthermore, it can be manipulated by management through the use of accounting policies and estimates.

See also

• Gross profit
• Operating income
• Earnings before interest and taxes (EBIT)
• Earnings before interest, taxes, depreciation, and amortization (EBITDA)

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