Net income is simply a measurement of the performance of a company. The net income formula is as follows:
Net Income = Revenues – Expenses
Different Names
Business people use a couple of different names when talking about net income. Sometimes they call it net earnings or net profits (in some cases they simply say earnings or profits). Another popular name for it is “the bottom line.” It is sometimes called the bottom line because it is shown on the very bottom line of the income statement (as illustrated below).
Note that when a company has more expenses than revenues this is known as a net loss.
How to Calculate Net Income
Calculating the net income of a company is relatively easy once you have all the necessary information. Simply take all the revenues and subtract all of the expenses (as shown on the income statement above). The accountants of an organization will gather all of this information and place it on the income statement. They will also do all of the adding and subtracting for you; all you have to do is find the bottom line of the income statement. When calculating income, don’t forget to subtract out the cost of goods sold.
Example
Below is an example of the net income for Google for the fiscal year ended December 31, 2010. These numbers are reported in thousands. This means that Google had a net income of over $8 billion in December. Not bad right?
Information Pulled from Yahoo Finance.
Impact of Net Income on Management and the Stock Market
The number represented by net income is of paramount importance to company management, investors, and creditors. A manager’s pay may be directly impacted by income. If income is up, then the manager may receive a raise or a bonus. If income is down, then management may be paid less (or they may just get fired). Stock prices rise and fall depending on the net income of a company.
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