Net income is the amount a company earns after deducting all direct and indirect expenses, interest and taxes from its sales revenue. Net income can also be referred to as net profit or net earnings. It is the very last line item on an income statement. It is also the actual amount of cash that would flow into the company's retained earnings account for dividend payments or reinvestment into the business. In order to arrive the net profit figure, we need to first start with the sales revenue, subtract the cost of goods sold (COGS), selling, general and administrative (SG&A) expense, other expenses, depreciation and amortization (D&A), and taxes to finally obtain the net profit. Net profit and the net profit margin are both useful measures of a company's profitability.

Linking to Other Financial Statements

The net income is linked to the other two of financial statements, the balance sheet and cash flow statement. On the balance sheet, it is used to calculate the ending retained earnings balance in the shareholders' equity section. The formula is given as follows: Ending retained earnings = Beginning retained earnings + Net income - Dividends If a company does not issue any dividends, then the change in retained earnings would simply equal to the net profit or loss in that particular period. In the cash flow statement, net earnings are included in the indirect method of calculating the operating cash flows.

Learn More About Net Income

Read CFI's guide to understand the definition of net profit, where to find the figure on an income statement, and its important in financial analysis. You can also browse all available accounting worksheets on CFI Marketplace to find more useful resources.  
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