The net income formula yields the residual amount of gain or loss remaining after expenses are deducted from revenue. The results of the net income formula are closely watched, since they reveal whether a business is likely to be a viable operating entity.
The formula appears near the bottom of the income statement. The following table, which comprises the net income formula, itemizes the general types of expenses that are deducted from revenue in order to arrive at net income:
||Cost of goods sold
|-||Gains and losses
|-||Other revenues and expenses
|-||Items that are unusual or infrequent
|=||Income from continuing operations
|+/-||Income/loss from the operations of a discontinued component|
|+/-||Gain /loss from disposal of a discontinued component
Note that other comprehensive income is a separate category of unrealized gains and losses that is not included in the derivation of net income. Instead, other comprehensive income is placed after the net income figure in the income statement.
The results of the net income formula may not be reliable, since management may fraudulently twist the rules of accrual basis accounting to modify the reported profit. This is particularly common when management is attempting reach a profit figure that will trigger bonus payments, or when there is outside pressure from the investment community to report high profits.
The net income formula is also known as the net income equation.