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What is Net Income Formula?
Net Income is the most looked after the number in the financial statement of a Company. Net Income equation is as below –
Net Income Formula = Total Revenues – Total Expenses.
- Net Income or Net profit is calculated so that investors can measure the amount by which the total revenue exceeds the total expenses of the Company.
- Total revenue includes earnings from the sale of goods and services, interest income and income from the sale of the business or other income
- Total expenses include Cost of goods and services sold, operating expenses like salaries and wages, office maintenance, utilities and depreciation, and amortization, interest income, and taxes.
Examples of Net Income Formula
Let’s take a few simples to advanced examples to understand Net Income equation –
Net Income Formula – Example #1
The Company ABC Inc. had revenue from the sale of $ 100,000 for the year 2017. It paid $ 20,000 as employee wages, $ 50,000 for raw materials and goods, $ 5,000 for other office and factory maintenance expenses. The Company had interest income of $ 3000 and paid $ 2500 in taxes. What is the net income of the Company ABC Inc.?
Total revenue of the Company = Revenue from sale + Interest Income
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- Total revenue = 100000 + 3000 = 103,000
Total expenses = Employee wages + raw materials + office and factory maintenance + interest income + taxes
- Total expenses = 20000 + 50000 + 5000 + 3000 + 2500 = $ 80, 500
Net Income Formula = Total revenue – total expenses
- Net income = 103000 – 80500
- Net income = $ 22,500
Net Income Formula – Example #2
Let us see the Profit and Loss statement of Apple and the net income reported by the Company.
Snapshots from the annual 10-K filling of the Company to SEC is as below. Calculation of net income is done as the bottom line of the profit and loss statement or the statement of operations. The net income of the Company is highlighted in yellow
source: Apple SEC filings
Net Income Formula Calculator
You can use the following Net Income Formula Calculator.
|Net Income Formula =||Total Revenues – Total Expenses|
|0 – 0 =||0|
Relevance and Uses of Net Income Equation
- Net Income equation is used for the calculation of the net income of the Company. Net Income is the most important number for the Company, analysts, investors, and shareholders of the Company as it measures the profit earned by the Company over the period of time.
- A lot of financial ratios are impacted by the net income number. Shareholders keenly follow this metric as the amount of dividend paid to the shareholders depends on the net income earned by the Company.
- Although, net income is an important metric in terms of profit earned by the Company is not the actual cash earned by the Company. The statement of operations or the profit and loss statement of the Company includes a lot of non-cash items such as the depreciation and amortization. Thus, any change in the net income or the financial ratios as such should be properly analyzed.
- Lower net income may be due to a lot of factors including poor sales, poor management, high expenses etc.
- Net income varies from Company to Company and industry to industry. It can vary due to the size of the Company and the industry in which it works. Some Companies have heavy asset business models thus, the depreciation expenses will be high while others may have light asset models. Further, growth factors in industries, debt levels, government taxes affect the net income numbers of the Company.
Net Income Formula in Excel (with excel template)
Let us have a look at another example of Net Income Equation and try to solve it in excel.
A Company XYZ has a total revenue of $ 500,000 and the Cost of goods sold by the Company are $ 120,000. The Company paid salary and wages to its employees to the tune of $ 30,000. It spent $ 20,000 on rent and other utilities. The Company records $ 15,000 as depreciation expense. The Company also pays interest on the long-term debt of $ 10,000 and pays taxes of $ 20,000.
The calculation of Net Income can be done simply by subtracting all the expenses from the revenue. The calculation of net income equation is shown in the below template.
In the below given excel template, we have used the Net Income formula calculation to find the Net Income.
The Net Income of the Company will be –
Net Income Formula Video
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This has been a guide to Net Income Formula. Here we discuss its uses along with simple to advanced practical examples to understand Net Income equation. Here we also provide you with Net Income Formula Calculator with downloadable excel template. You can learn more about Excel Modeling from the following articles –