Net income is defined as which of the following?

Net income is defined as which of the following?

• A. Net income is the amount by which revenues exceed expenses.
• B. Net income is the amount by which expenses exceed revenues.
• C. Net income equals total assets minus total liabilities.
• D. Net income equals cash flow from financing.

Answer: (A)

Net income measures profitability over a period. It’s calculated by subtracting expenses from revenues, so when revenues exceed expenses you have a positive net income. If expenses exceed revenues, that difference is a net loss, not net income. Net income isn’t the same as equity (which is assets minus liabilities) and it isn’t the cash flow from financing activities—that cash flow shows how money moves during financing, not the profit figure from operations. For example, if revenues are 120 and expenses are 95, net income is 25.

Net income measures profitability over a period. It’s calculated by subtracting expenses from revenues, so when revenues exceed expenses you have a positive net income. If expenses exceed revenues, that difference is a net loss, not net income. Net income isn’t the same as equity (which is assets minus liabilities) and it isn’t the cash flow from financing activities—that cash flow shows how money moves during financing, not the profit figure from operations.

For example, if revenues are 120 and expenses are 95, net income is 25.