net income

Examples of net income in the following topics:

• Free Cash Flow

  • Free cash flows = Net profit + Interest expense - Net Capital Expenditure (CAPEX) - Net change in Working Capital - Tax shield on Interest Expense
  • There are two differences between net income and free cash flow.
  • The net income measure uses depreciation, while the free cash flow measure uses last period's net capital purchases.
  • The second difference is that the free cash flow measurement deducts increases in net working capital, where the net income approach does not.
  • Some investors prefer using free cash flow instead of net income to measure a company's financial performance because free cash flow is more difficult to manipulate than net income.

• Earnings per Share

  • In the United States, the Financial Accounting Standards Board (FASB) requires that companies' income statements report EPS for each of the major categories of the income statement: continuing operations, discontinued operations, extraordinary items, and net income.
  • The EPS formula does not include preferred dividends for categories outside of continued operations and net income.
  • Earnings per share for continuing operations and net income are more complicated; any preferred dividends are removed from net income before calculating EPS.
  • To find diluted EPS, basic EPS is first calculated for each of the categories on the income statement.
  • Morningstar reports diluted EPS "Earnings/Share $" (net income minus preferred stock dividends divided by the weighted average of common stock shares outstanding over the past year).

• Reporting Stockholders' Equity

  • Equity (beginning of year) + net income − dividends +/− gain/loss from changes to the number of shares outstanding = Equity (end of year).
  • In financial accounting, owner's equity consists of an entity's net assets.
  • Equity (beginning of year) + net income − dividends +/− gain/loss from changes to the number of shares outstanding = Equity (end of year).
  • Dirty surplus accounting involves the inclusion of other comprehensive income or unusual items in net income, which will consequently flow into retained earnings.
  • These items can skew net income and provide information that could be misleading.

• Defining the Income Statement

  • Income statement is a company's financial statement that indicates how the revenue is transformed into the net income.
  • Income statement, also referred to as profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations, is a company's financial statement that indicates how the revenue (cash or credit sales of products and services before expenses are taken out) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as Net Profit or "bottom line").
  • The income statement can be prepared in one of two methods.
  • When combined with income from operations, this yields income before taxes.
  • The final step is to deduct taxes, which finally produces the net income for the period measured.

• Elements of the Income Statement

  • The income statement, or profit and loss statement (P&L), reports a company's revenue, expenses, and net income over a period of time.
  • The income statement consists of revenues (money received from the sale of products and services, before expenses are taken out, also known as the "top line") and expenses, along with the resulting net income or loss over a period of time due to earning activities.
  • Net income (the "bottom line") is the result after all revenues and expenses have been accounted for.
  • The final step is to deduct taxes, which finally produces the net income for the period measured.
  • The "bottom line" of an income statement—often, literally the last line of the statement—is the net income that is calculated after subtracting the expenses from revenue.

• Income Statements

  • Income statement is a company's financial statement that indicates how the revenue is transformed into the net income.
  • This indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as "Net Profit" or the "bottom line").
  • The final step is to deduct taxes, which finally produces the net income for the period measured.
  • These are reported net of taxes.
  • Bottom line is the net income that is calculated after subtracting the expenses from revenue.

• Return on Common Equity

  • Return on equity (ROE) measures how effective a company is at using its equity to generate income and is calculated by dividing net profit by total equity.
  • ROE is the ratio of net income to equity.
  • From the fundamental equation of accounting, we know that equity equals net assets minus net liabilities.
  • The return on equity is a ratio of net income to equity.
  • It is a measure of how effective the equity is at generating income.

• Uses of the Income Statement

  • The primary purpose of the income statement is to demonstrate the profitability of an organization's operations over a fixed period of time by illustrating how proceeds from operations (i.e. revenues) are transformed into net income (profits and losses).
  • The income statement is relatively straight-forward.
  • Profit margin: A higher net profit as a proportion of sales indicates an overall higher capacity to capture returns on revenue.
  • Operating Margin: Another useful indicator of profitability is operating income over net sales.
  • This is a simple example of the typical line items on an income statement.

• Recording Sales

  • Also referred to as revenue, they are reported directly on the income statement as sales or net sales.
  • In financial ratios that use income statement sales values, "sales" refers to net sales, not gross sales.
  • The sales portion of an income statement for merchandising companies is figured as noted below:
  • Gross sales do not normally appear on an income statement.
  • The sales figures reported on an income statement are net sales.

• Profit Margin

  • Net profit is the gross profit minus all other expenses.
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
  • Companies need to have a positive profit margin in order to earn income, although having a negative profit margin may be advantageous in some instances (e.g. intentionally selling a new product below cost in order to gain market share).
  • It is difficult to accurately compare the net profit ratio for different entities.
  • The percentage of net profit (gross profit minus all other expenses) earned on a company's sales.