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Net Income

A company’s total earning is called Net Income. Once all the cost of doing business, depreciation, interest, taxes and other expenses are adjusted against revenues, the amount you get is the company’s net income. Net income is also referred to as net profit, or net earnings. In the U.K., net income is known as “profit attributable to shareholders”. It is also referred to as the bottom line since is listed at the bottom of the income statement. Net income may be distributed among holders of common stock as a dividend. On the other hand, it may be held by the firm as retained earnings. The formula for net income is as follows:

Total Revenues – Total Expenses = Net Income

The items included in expenses vary from firm to firm and depend upon the nature of the firm’s business. In most cases, the items included in expenses usually include tax expense, financing expense (interest expense), and minority interest. Similarly, preferred stock dividends will be subtracted too, even though they are not an expense. For a merchandising company, deductible expenses include cost of goods sold, sales discounts, and sales returns and allowances. For a company selling a product, the cost of advertising, manufacturing, and design and development of the product are considered as deductible expenses.

An equation for net income in merchandising:

Net income or net loss = Revenue – Cost of goods sold – Sales discounts – Sales returns and allowances – Expenses – Minority interest – Preferred stock dividends

Why Is Net Income Important?

Net Income is one of the most important numbers on a company’s balance sheet. It is not just a matter of record, but a significant player in many other financial roles. However, it is important to remember that the net income does not indicate how much money the company earned in a financial year. This is because the calculation of the net income also includes a host of non-cash expenses such as depreciation and amortization.

Another important aspect of net income that must be remembered is that net income figures can be greatly influenced by the method of computation used. The changes we are talking about here have no connection to the company’s operating practices. Instead, theses are methods of accounting systems used to arrive at the net income of a company. It is important to stay current with regard to the latest standards in accounting.

Net income of a company is subjected to a lot of analysis. This is because studying the net income can provide insight into the proper workings of a company. For instance, if the net income is low, or negative, it could be a result of a number of problems including, not enough customers, disproportionate expenditure on marketing the product, faulty expense management, etc.

A low net income could also be a result of a company trying to minimize their tax liability by showing low net income. This is fraud and the person or company engaged in it is liable to federal action.

Tags: cash, Income, market, money, revenue, tax

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