Formula to Calculate Net Income

The 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 some time.

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  • Net Income or Net profit is calculated so that investors can measure the amount by which the total revenue exceeds the company’s total expenses.Total revenue includes earnings from the sale of goods and services, interest income, and income from the sale of the business or other incomeTotal 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. read more, and taxes.

Examples

Example #1

Company ABC Inc. had revenue from the sale of $ 100,000 for 2017. It paid $ 20,000 in employee wages, $ 50,000 for raw materials and goods, and $ 5,000 for other office and factory maintenance expenses. In addition, the Company had an 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 – 80500Net income = $ 22,500

Example #2

Let us see Apple’s Profit and Loss statement and the company’s net income.

Snapshots from the annual 10-K filing of the Company to the SEC are as below. Calculating 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. read more 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.

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.read more.A lot of financial ratios are impacted by the net income number. Shareholders follow this metric as the dividend paid to the shareholders depends on the net income the Company earns.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 company’s profit and loss includes many 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.read more 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.read more, as such, should be properly analyzed.Lower net income may be due to many 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, and 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.

Net income can be calculated simply by subtracting all the expenses from the revenue. For example, 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

Recommended Articles –

This has been a guide to Net Income Formula. Here we learn how to calculate net income using its formula and some practical examples. Here we also provide you with Net Income Calculator with a downloadable excel template. You can learn more about Excel Modeling from the following articles –

  • Partial Income StatementPartial Income StatementA partial Income statement is generally prepared by the company when there are certain or uncertain changes which affect the company’s financial performance and is reported for only a part of the accounting period. Normally, an income statement is prepared for a single month or for a year. However, a partial income statement can be prepared for the specific dates like from October 2, 2018, to October 29, 2018.read moreEBITDA vs. Net Income – DifferencesEBITDA Vs. Net Income - DifferencesEBITDA refers to earnings of the business earned during the period without considering the interest expense, tax expense, depreciation expense and amortization expenses. In contrast, net income refers to earnings of the business earned during the period after considering all the expenses incurred by the company.read moreGross Income vs. Net IncomeGross Income Vs. Net IncomeGross income refers to the income left after deducting the cost of the goods sold from the revenue earned. In contrast, net income is the amount left as the earning after deducting all the expenses, including other expenses as dividends from the gross income.read moreNOPAT vs. Net IncomeNOPAT Vs. Net IncomeNOPAT (net operating profit after tax) is net earnings of the business before deducting the interest charges but after directly deducting the tax on such operating income earned. Net Income refers to earnings after considering all the expenses incurred.read more