What is the equation for net income?

What is the equation for net income?

• A. Net Income = Sales - All expenses.
• B. Net Income = Net Sales - CoGS.
• C. Net Income = Gross Profit - Operating Expenses.
• D. Net Income = Revenue - Costs.

Answer: (A)

Net income shows what’s left after every cost has been subtracted from revenue. The best way to express that is net income equals Sales minus all expenses, because it accounts for every expense a business incurs—from the cost of goods sold to operating costs, interest, taxes, and any other costs. This is the bottom-line figure on the income statement. It’s important to see why the other forms aren’t net income. Net sales minus cost of goods sold gives you gross profit, not net income, since it doesn’t include operating expenses or other costs. Gross profit minus operating expenses equals operating income, which still leaves out non-operating items like interest and taxes. Revenue minus costs can be vague—“costs” might refer only to certain costs, not all expenses—so it isn’t a precise definition of net income.

Net income shows what’s left after every cost has been subtracted from revenue. The best way to express that is net income equals Sales minus all expenses, because it accounts for every expense a business incurs—from the cost of goods sold to operating costs, interest, taxes, and any other costs. This is the bottom-line figure on the income statement.

It’s important to see why the other forms aren’t net income. Net sales minus cost of goods sold gives you gross profit, not net income, since it doesn’t include operating expenses or other costs. Gross profit minus operating expenses equals operating income, which still leaves out non-operating items like interest and taxes. Revenue minus costs can be vague—“costs” might refer only to certain costs, not all expenses—so it isn’t a precise definition of net income.