# What is net income? Definition, calculation and example

## What is net income?

Net income is the amount of money left over from a business’s revenue after expenses and tax payments have been made during a period. It is an essential measure for understanding the financial strength of a company. Investors and analysts look at a company’s net income to determine its level of profitability. For example, net income to sales – a measure known as net income margin or net profit margin – would indicate a company’s ability to generate profits. If expenses exceed income, it would be a net loss – or just a loss – for the period.

For the company’s management team, net income is useful in determining areas in which to adjust its finances, whether it is to reduce certain expenses such as the cost of goods sold, salaries and payments. interest, or to increase production to increase income. It is also useful to understand how to redistribute the money to shareholders in the form of dividends.

For publicly traded companies, net income is found in the income statement portion of financial statements filed quarterly and annually with the Securities and Exchange Commission. Net income is also referred to as net profit, net profit or profit. Just as income is called the top item in the income statement (before deducting expenses), net income is the bottom item (after deducting all expenses).

Net income is a measure under generally accepted accounting principles (GAAP). Terms related to net income but not in accordance with GAAP include adjusted net income and EBIT, as their calculations do not follow accounting rules.

## How to Calculate Net Income

The easiest way to calculate net income is to subtract all expenses and tax payments from a business’s income. But there are specific items along the way to deduct from income. The first thing to remember is the cost of goods sold, which leads to gross margin or gross profit. Operating expenses are subtracted from gross profit and the difference is operating profit. Interest expense (or debt financing costs) and tax payments are deducted from operating income, and this difference leads to net income.

### Net income formula

Net Income = Cost of Goods Sold – Operating Expenses – Interest Costs – Tax Payments

Figures are in millions of US dollars, except for percentage change, number of shares and earnings per share, which are in dollars.

Apple Form 10-K

Apple 2021 % Change 2020 % Change 2019 % Change 2018 % Change 2017

Some products

297 392

35%

220,747

3%

213,883

-5%

225,847

15%

196,534

Services

68,425

27%

53,768

16%

46,291

16%

39,748

22%

32,700

Total net sales

365,817

33%

274,515

6%

260 174

-2%

265,595

16%

229 234

Cost of sales :

Some products

192,266

27%

151,286

4%

144,996

-2%

148 164

17%

126,337

Services

20,715

13%

18,273

9%

16,786

8%

15,592

6%

14,711

Total cost of sales

212,981

26%

169,559

5%

161,782

-1%

163,756

16%

141,048

Gross margin

152,836

46%

104,956

7%

98,392

-3%

101,839

15%

88 186

Operating costs :

Research and development

21,914

17%

18,752

16%

16,217

14%

14,236

23%

11,581

Selling, general and administrative expenses

21,973

ten%

19,916

9%

18,245

9%

16,705

9%

15,261

Total operating expenses

43,887

13%

38,668

12%

34,462

11%

30,941

15%

26,842

Operating result

108,949

64%

66,288

4%

63,930

-ten%

70,898

16%

61,344

Other income/(expense), net

258

-68%

803

-56%

1,807

-ten%

2005

-27%

2,745

Earnings before provision for income taxes

109 207

63%

67,091

2%

65,737

-ten%

72,903

14%

64,089

Provision for income taxes

14,527

50%

9,680

-8%

10,481

-22%

13,372

-15%

15,738

94,680

65%

57,411

4%

55,256

-7%

59,531

23%

48,351

Earnings per share:

Basic

5.67

71%

3.31

11%

2.99

-75%

12.01

30%

9.27

Diluted

5.61

71%

3.28

ten%

2.97

-75%

11.91

29%

9.21

Shares used in the earnings per share calculation:

Basic

16,701,272

-4%

17,352,119

-6%

18,471,336

273%

4,955,377

-5%

5,217,242

Diluted

16,864,919

-4%

17,528,214

-6%

18,595,651

272%

5,000 109

-5%

5,251,692

## Net income example: Apple (NASDAQ: AAPL)

In the table above for Apple’s annual income statements from 2017 to 2021, the first revenue item is labeled net sales. Moving down the income statement, items are deducted line by line, forming subtotals along the way, until you reach the net result.

Some investors tend to focus on gross margin because it helps them understand basic production costs before additional expenses are deducted.

Some companies separate their net income into two types: net income attributable to the corporation and net income attributable to common shareholders. Net profit attributable to common stockholders is the true bottom line, because profit excludes dividends paid to a separate class of shareholders.

Apple breaks down its net earnings into earnings per share, which is categorized by basic and diluted shares, and either figure is calculated by dividing net earnings by the number of common shares. The basic number is the number of common shares outstanding, while the diluted number is the preferred measure because it takes into account securities that can be converted into common shares, such as stock options and convertible bonds .

In special cases, a business may include revenue that is non-recurring or that is not included as part of periodic reporting. This would be known as a non-recurring item or an extraordinary (one-time) item and would skew the net income figure. An extraordinary item of income or loss would relate to the gain or loss from the sale or acquisition of an asset, for example.

## How is net income used?

Net income can be used to redistribute money to shareholders in the form of dividends or share buybacks. Dividend investors tend to favor utility stocks because they typically use a large portion of their net income to pay dividends to shareholders, for example. Some companies might also use their profits to repurchase shares on the open market to increase earnings per share, in the hope that this improves shareholder value – the fewer shares on the open market, the more earnings per share are high. Share buybacks are then converted into treasury stock, which the company can use to issue stock options or resell them later.

Any money remaining and not distributed to shareholders becomes retained earnings, which is reported in the statement of equity. Net income for the period can be transferred to retained earnings.

## How to interpret net income

Investors and analysts use net income to compare the earnings of companies in the same industry. Profitability ratios such as net profit margin are popular measures for assessing a company’s ability to generate profits.

As shown in the chart above, Apple’s earnings rose significantly in 2021 from a year earlier as sales of its products and services grew faster than its cost of sales. Its net income nearly doubled in 5 years, from \$48.4 billion in 2017 to \$94.7 billion in 2021, as management managed to control operating expenses.

## How does net income affect the balance sheet?

Net income is paid into equity in the form of retained earnings. Retained earnings include profits from previous periods and net income from the last period, excluding dividends to be distributed.

## What is the difference between net income and operating cash flow?

Net income serves as a measure of financial performance, while cash flow is not a measure of profitability. Cash flow helps track a company’s cash inflow by period and also helps track its current account. Operating cash flow is calculated by adding the cash balance to the cash inflows and then subtracting the cash outflows.

Operating cash flow formula

Cash Flow = Cash Balance + Cash In – Cash Out

## Frequently Asked Questions (FAQ)

Here are answers to some of the most frequently asked questions by investors about net income.

### Can net income be greater than income?

Net income is less than income because income is the first item from which expenses are deducted. However, in rare cases, net income may exceed income if extraordinary or one-time items are included in a period.

### Can net income be negative?

Net income can be negative if expenses exceed income, and this figure would be called net loss, or simply loss. The net income can also be zero.

### Is negative net income bad?

A negative net income, or loss, for a period means the business is not profitable. But some investors and analysts may argue that for newly established companies or startups, the degree of losses for a period or more may be justified as the money is spent to expand its business.

### What is a good net income?

This is subjective to the views of senior management, investors and analysts. If the company is profitable, then it is positive on the bottom line. Some startups post losses for quarters or even years before turning a profit.

### Is net income a GAAP term?

Net income is a term used under generally accepted accounting principles.

### What is net income per share or earnings per share?

Earnings per share is calculated by dividing net earnings by the number of common shares outstanding.

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