Formula to Calculate Net Income
Net Income formula is used for the calculation of the net income of the Company. It 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 a period of time.
- 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 the cost of goods and services sold, operating expenses like salaries and wages, office maintenance, utilities and depreciation, and amortization, interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. , and taxes.
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.?
The Total revenue of the Company = Revenue from sale + Interest Income
- Total revenue = 100000 + 3000 = 103,000
The Total expenses = Employee wages + raw materials + office and factory maintenance + interest income + taxes
- Total expenses = 20000 + 50000 + 5000 + 3000 + 2500 = $ 80, 500
The Net Income = Total revenue – total expenses.
- Net income = 103000 – 80500
- Net income = $ 22,500
Let us see the Profit and Loss statement of Apple and the net income reported by the Company.
Snapshots from the annual 10-K filing of the Company to SEC is as below. Calculation of net Income is done as the bottom lineBottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its 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 Calculator
You can use the following Net Income Calculator.
|Net Income Formula =||Total Revenues – Total Expenses|
|0 – 0 =||0|
Relevance and Uses
- Net Income is the most looked after the number in the financial statement of a CompanyFinancial Statement Of A CompanyFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels..
- 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 itemsNon-cash ItemsNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation. such as depreciation and amortization. Thus, any change in the net income or the financial ratiosFinancial RatiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on., 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 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 CompanyCost Of Goods Sold By The CompanyThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. are $ 120,000. The Company paid salaries 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 a 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 is shown in the below template.
In the below given excel template, we used the Net Income formula to calculate Net Income.
The Net Income of the Company will be –
Net Income Formula Video
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