How to calculate Net Income (NI)?

Net income is the total amount of money earned by an individual or business in a given time period, after deducting taxes, expenses, and interest.

To determine the NI of a company, consider the total revenue, and subtract the business’s expenses and operating costs from this figure to calculate earnings before taxes. Further, subtract tax from this figure to get the NI.

Why is it critical to calculate Net Income?

NI is a useful number for investors to determine how much an organization’s revenue exceeds its expenses. This figure appears on a company’s income statement and is an indicator of profitability. It appears at the bottom of the income statement, because of which business analysts frequently refer to NI as the bottom line. However, some income statements will include a separate section at the bottom that reconciles beginning retained earnings with ending retained earnings via net income and dividends. The income statement can also be called net income, net profit, or net earnings.

NI is critical because it is a central line item on all three financial statements. While it is calculated on the income statement, net profit is also used on the balance sheet and cash flow statement.

Conclusion
NI is an accounting metric that does not represent a company’s economic profit or cash flow as it includes non-cash expenses such as depreciation, amortization, stock-based compensation, and so on, it is not equal to the amount of cash flow generated by a company during the period.

As a result, financial analysts go to great lengths to reverse all accounting principles to arrive at cash flow for valuing a company.

Did you know?

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