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# How to Calculate Net Income

Net income is your total income after taxes, deductions, credits, and business operating expenses. There is a slightly different process for calculating your personal net income, and calculating your business net income. It involves looking through some records and doing a bit of math, but calculating your net income is simple once you know the process.

## Steps Edit

### Method One of Two:

Calculating Personal Net Income Edit

### Method Two of Two:

Calculating Business Net Income Edit

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# Net Income

Net income represents the amount of money remaining after all operating expenses , interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company’s total revenue .

## How it works (Example):

Net income is also referred to as the bottom line , net profit or net earnings . The formula for net income is as follows:

Total Revenue – Total Expenses = Net Income

Net income is found on the last line of the income statement , which is why it’s often referred to as the bottom line. Let’s look at a hypothetical income statement for Company XYZ:

By using the formula we can see that:

Net Income = \$100,000 – \$20,000 – \$30,000 – \$10,000 – \$10,000 = \$30,000

## Why it Matters:

Net income is one of the most closely followed numbers in finance, and it plays a large role in ratio analysis and financial statement analysis. Shareholders look at net income closely because it is the main source of compensation to shareholders of the company (via dividends and share buybacks), and if a company cannot generate enough profit to adequately compensate owners, the value of shares will plummet. Conversely, if a company is healthy and growing, higher stock prices will reflect the increased availability of profits.

One of the most important concepts to understand is that net income is not a measure of how much cash a company earned during a given period. This is because the income statement includes a lot of non-cash expenses such as depreciation and amortization .

To learn about how much cash a company generates, you need to examine the cash flow statement (click here to read 10 Things to Know About Every Cash Flow Statement ).

Changes in net income are endlessly scrutinized. In general, when a company’s net income is low or negative, a myriad of problems could be to blame, ranging from decreasing sales to poor customer experience to inadequate expense management.

Net income varies greatly from company to company and from industry to industry. Because net income is measured in dollars and companies vary in size, it is often more appropriate to consider net income as a percentage of sales, known as “profit margin .” Another common ratio is the price-to-earnings ( P/E ) ratio, which tells investors how much they are paying (the stock ‘s price) for each dollar of net income the company is able to generate.

If you’d like to read more in-depth information about using net income and other income statement line items, check out the following:

Income Statement definition — Learn about this all-important financial statement used to calculate profitability.

Price-to-Earnings Ratio definition — Learn how to calculate and use the P/E ratio, one of the most used ratios in investing.

Financial Statement Analysis: The Income Statement — Learn the most important components of the income statement and how to use them to determine a company’s profitability.

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# Net income formula?

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The formula is Total Revenue – Total Expenses = Net Income.

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# How to Calculate Net Operating Income (NOI)

As a real estate professional serving investment clients, you need to be very familiar with all the methods of valuation of income properties. One of these is the calculation of Net Operating Income, as it is used with cap rate to determine the value of a property.

### Here s How:

1. Determine the Gross Operating Income (GOI) of the property:
1. Determine the operating expenses of the property. This would include expenses for management, legal and accounting, insurance, janitorial, maintenance, supplies, taxes, utilities, etc.
2. Subtract the operating expenses from the Gross Operating Income to arrive at the Net Operating Income. Using the example of a property with a gross operating income of \$52,000 and operating expenses of \$37,000, our net operating income would be:

\$52,000 – \$37,000 \$15,000 Net Operating Income

Commercial lenders use different qualification criteria to determine if a mortgage is warranted and how much they will loan against a property. The investor owners usually aren t individually evaluated as to their credit history, as it s not as important to the lender as the income generation potential of the property to be mortgaged.

The fact is that a home buyer is going to live in the home they re buying, so the lender evaluates their ability to pay the mortgage and their history of paying debt obligations.

It s a very different situation from a commercial property, let s say an office complex. The buyers are buying this property for one single purpose; to generate positive cash flow from rental income.

### Income

The motivation for the purchase is income, so the lender wants to evaluate the property based mostly on the income it will generate.

Sure, property condition and other factors enter into the mortgage qualification, but income is the big factor. If the property can service the debt (pay the mortgage payments) and still have an acceptable monthly income cash flow, then a mortgage is likely to be initiated.

### Expenses

Of course, expenses are one half of the major considerations in the NOI calculation. It is critical to capture all of the operating expenses of the property. These can and often do include:

• Marketing and Advertising – Depending on the property type, this expense category can vary a lot. For an apartment property, most of this expense would be advertising to generate tenant applicants. For a retail or office property, the same would apply, but there may also be marketing expenses to present the property to consumers or clients for the tenants.
• Management – Professional management is the norm for larger commercial properties. This expense is significant, but it can be offset a lot by the savings professional management can generate in the operation and maintenance of the property.
• Utilities – Those not passed along to tenants would be in this category.
• Repairs and Maintenance – Everything from landscaping to fixing broken air conditioning units or painting of units is in this bucket.
• Insurance – This is a major expense as well.

Those are the main categories, and there are other expenses that are dependent on the use of the property and the tenants.

If the ratios wanted by the lender based on income are not pointing to approval, the borrowers can come up with more cash for a down payment to bring the ratios into line. Net Operating Income is very important in commercial lending.

1. Be very careful to get all the operating expenses into the calculation. Missing expenses will increase net operating income and thus cause your client to overpay for the property based on valuation using cap rate.
2. For the most used investor calculations explained and a spreadsheet to calculate them, take this lin, for the top 10 calculations.

### What You Need:

• Calculator
• Comprehensive itemization of operating expenses.

None of these calculations are rocket science. You ll quickly get up to speed and be able to do them or discuss them intelligently with commercial investor clients.

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# Residual Income Formula

Residual income is a great way to be paid. In fact if you get the right residual income formula you will be paid every month for life even when you have finished working the business opportunity.

A residual income, also known as royalty income is a very simple structure on which you get paid not only on your efforts but by other peoples efforts also. A typical situation would be working for a company with a product you use and recommend. You would pay to use this product, and when you recommend the product and get sales, you will earn a percentage of this sale every month.

Depending on the program you are involved with will depend upon how your payment structure works.

Its like a song writer with royalty income. They write that song only once, the song gets published and sold to the public, every time that song gets used, sold, or sung by a new artist, the song writer gets a royalty. This is usually in the form of a small commission, however, this soon grows into hundreds of thousands. You can imagine how often a great song is bought, played, and has a cover copy done. This is a great example of a royalty income. Like I said, a royalty income is more or less the same as a residual income. You are getting paid later, for work you are doing now. This work is also leveraged by others who are also working the same business. But the true genius of this system is that everybody has the same to gain.

So how do you make a residual income work for you. Online you will find tonnes of opportunities online which offer a residual payment plan when you join their business. In fact there are so many out there it is very difficult to know which one to choose.

To find a successful one you need to adapt to the way of thinking which really examines the product, including the value and popularity of it. Its to easy to be taken in by the huge residual promise of high earnings, but in my opinion, you choose based on the product and not how much you get per sale.

If the product is in high demand, very good in its niche, has a great long term company with history, and is at a very competitive price, then you have the perfect formula for a successful residual income. Even if you are getting less than a dollar per sale, at least you know it will sale, and if it is selling, then you are building a down line who are also selling, along with a residual income.

So you can see how important this is to get right. Dont be dazzled by high earnings claims when choosing your residual business. The chances are it wont work for you and may put you off working towards your own residual income.

Just remember. Great product, great value, great company history, all leads to great residual income.

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# residual income formula

• Accounting

## What is residual income in accounting?

February 19, 2012

Learn about residual income and how to calculate it using income from operations, earnings before interest and taxes (EBIT), net operating profit after tax (NOPAT), or net income.

## 1. Definition of residual income in accounting

In decentralized operations, residual income is the excess of income from operations over the minimum acceptable income.

The concept of residual income dates back Alfred Marshall in the late 1880s. In 1920s General Motors used the concept to evaluate its business segments. Residual income is often called Economic Value Added (EVA) as copyrighted by Stern Stewart Co, a consulting firm, in 1994.

Residual income is a company or division performance measure. It can also be used to evaluate investment alternatives.

## 2. Residual income formula

To calculate the residual income, the following formula can be used:

Residual Income = Income from Operations – Minimum Acceptable Income

Residual income is a dollar amount, which can be either positive or negative:

• When a positive residual income takes place, a company (division, segment, investment) is creating wealth.
• When a negative residual income takes place, a company (division, segment, investment) is consuming capital.

The following residual income calculations exist:

• Income from operations less minimum acceptable income (i.e., minimum return on operational assets)
• Net income less equity charge
• Net operating profits after tax (NOPAT) less capital charge

Companies can use the following income values: income from operations (IFO) or earnings before interest and taxes (EBIT), net operating profit after tax (NOPAT), net income, etc.

The minimum acceptable income is usually determined by multiplying average operating assets by a minimum rate of return (i.e., weighted average cost of capital). For example, if division A has \$200,000 of average operating assets and the top management established 10% as the minimum acceptable rate of return (i.e., based on the cost of financing the business operations), then the minimum acceptable income for division A is \$20,000 (i.e., \$200,000 x 10%).

Instead of the minimum return on operational assets, companies can use an equity charge or capital charge. The equity charge is the estimated cost of equity capital. It is determined by multiplying equity capital by the cost of equity capital. The capital charge is the estimated total cost of capital: it includes both the debt charge and the equity charge.

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# Net income formula?

Would you like to merge this question into it?

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The formula is Total Revenue – Total Expenses = Net Income.

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# residual income formula

• Accounting

## What is residual income in accounting?

February 19, 2012

Learn about residual income and how to calculate it using income from operations, earnings before interest and taxes (EBIT), net operating profit after tax (NOPAT), or net income.

## 1. Definition of residual income in accounting

In decentralized operations, residual income is the excess of income from operations over the minimum acceptable income.

The concept of residual income dates back Alfred Marshall in the late 1880s. In 1920s General Motors used the concept to evaluate its business segments. Residual income is often called Economic Value Added (EVA) as copyrighted by Stern Stewart Co, a consulting firm, in 1994.

Residual income is a company or division performance measure. It can also be used to evaluate investment alternatives.

## 2. Residual income formula

To calculate the residual income, the following formula can be used:

Residual Income = Income from Operations – Minimum Acceptable Income

Residual income is a dollar amount, which can be either positive or negative:

• When a positive residual income takes place, a company (division, segment, investment) is creating wealth.
• When a negative residual income takes place, a company (division, segment, investment) is consuming capital.

The following residual income calculations exist:

• Income from operations less minimum acceptable income (i.e., minimum return on operational assets)
• Net income less equity charge
• Net operating profits after tax (NOPAT) less capital charge

Companies can use the following income values: income from operations (IFO) or earnings before interest and taxes (EBIT), net operating profit after tax (NOPAT), net income, etc.

The minimum acceptable income is usually determined by multiplying average operating assets by a minimum rate of return (i.e., weighted average cost of capital). For example, if division A has \$200,000 of average operating assets and the top management established 10% as the minimum acceptable rate of return (i.e., based on the cost of financing the business operations), then the minimum acceptable income for division A is \$20,000 (i.e., \$200,000 x 10%).

Instead of the minimum return on operational assets, companies can use an equity charge or capital charge. The equity charge is the estimated cost of equity capital. It is determined by multiplying equity capital by the cost of equity capital. The capital charge is the estimated total cost of capital: it includes both the debt charge and the equity charge.

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# Ten Managerial Accounting Formulas

## Managerial Accounting For Dummies

Managerial accountants compute and provide information within a company. Managerial accounting information is numeric, calculated using certain formulas. The following list summarizes some of the most important formulas in managerial accounting.

## The accounting equation

The accounting equation equates assets with liabilities and owners equity:

Assets = Liability + Owners Equity

Assets are things owned by the company such as cash, inventory, and equipment that will provide some future benefit. Liabilities entail future sacrifices that the company must make, such as paying bills or other kinds of debts. Owners equity represents the portion of the company that actually belongs to the owner.

A basic rule of accounting is that the accounting equation must always balance. If assets exceed the sum of liabilities and owners equity, then the company holds things that don t belong to anyone. If the sum of liabilities and owners equity exceeds assets, then owners and creditors lay claim to things that don t exist.

## Net income

Net income is called the bottom line because in many ways it s the sum total of accountants work. To calculate net income, subtract expenses from revenues:

Revenues Expenses = Net income

Revenues are inflows and other kinds of sales to customers. Expenses are costs associated with making sales. Accountants also sometimes need to add gains or subtract losses in net income; these gains and losses come from miscellaneous events that affect stockholder value, such as selling equipment at a gain or getting your factory destroyed by a mutated prehistoric survivor of the dinosaurs.

## Cost of goods sold

For manufacturers and retailers, cost of goods sold measures how much the company paid or will need to pay for inventory items sold.

To compute a retailer s cost of goods sold, use the following formula:

Beginning + Inputs = Outputs

Cost of beginning inventory + Cost of purchases Cost of ending inventory = Costs of goods sold

Here, a retailer s inputs are the cost of the purchases it makes. The outputs are the goods that were sold (recorded at cost, of course).

## Contribution margin

Contribution margin measures how selling one item, or a group of items, increases net income. To calculate contribution margin, subtract variable costs from sales:

Total sales Total variable cost = Total contribution margin

Contribution margin helps managers by explaining how decisions will impact income. Should you prepare a special order with a contribution margin of \$100,000? Yes, because it will increase net income by \$100,000. Should you prepare another special order with a contribution margin of negative \$50,000? No, because it will decrease net income.

To compute contribution margin per unit, divide the total contribution margin by the number of units sold. Alternatively, you can calculate sales price less variable cost per unit:

Sales price Variable cost per unit = Contribution margin per unit

To compute contribution margin ratio, divide contribution margin by sales, either in total or per unit:

## Cost-volume profit analysis

Cost-volume-profit (CVP) analysis helps you understand how changes in volume affect costs and net income. If you know sales price, variable cost per unit, volume, and fixed costs, this formula will predict your net income:

Net income = (Sales price Variable cost per unit)(Volume) Fixed costs

First, understand where this formula comes from. Consider how production volume affects total costs:

Total cost = (Variable cost per unit x Volume) + Fixed costs

Variable cost per unit is the additional cost of producing a single unit. Volume is the number of units produced. Fixed cost is the total fixed cost for the period. Net income is just the difference between total sales and total cost:

Net income = (Sales price x Volume) Total cost

Combining these two equations gives you the super-useful formula for understanding how volume affects profits:

Not coincidentally, a critical part of this formula equals contribution margin remember that sales price less variable cost per unit equals contribution margin per unit:

Sales price Variable cost per unit = Contribution margin per unit

This formula lets you further simplify the CVP formula:

Net income = (Contribution margin x Volume) Fixed costs

## Break-even analysis

Break-even analysis helps you determine how much you need to sell in order to break even that is, to earn no net loss or profit. To figure out the break-even point, use this formula:

Perhaps you recognize contribution margin in the denominator (Sales price Variable cost per unit), allowing you to further simplify this formula:

To figure out the number of units needed to break even, just divide total fixed costs by contribution margin per unit.

## Price variance

Price variance tells you how an unexpected change in the cost of direct materials affects total cost. Use this formula to compute price variance:

Price variance = (Standard price Actual price) x Actual quantity

Standard price is the amount you originally expected to pay, per unit, of direct materials. Actual price is the real price you paid, per unit, for direct materials. The actual quantity is the number of units purchased and used in production.

Although the price variance formula focuses on the direct materials variance, you can easily adapt it to figure out the direct labor variance. To do so, replace standard price with the standard cost (per hour) of direct labor. Replace actual price with the actual cost (per hour) of direct labor. Then replace the actual quantity with the actual number of hours worked.

## Quantity variance

The direct materials quantity variance measures how using too much or too little in direct materials affects total costs. Stinginess in using direct materials should decrease your costs. However, wasting direct materials should increase costs. Here s the formula:

Quantity variance = Standard price x (Standard quantity Actual quantity)

Remember that standard price is how much you originally expected to pay, per unit, of direct materials. Standard quantity is the number of units of direct materials that you expected to use. Actual quantity is the number of units of direct materials that you actually used in production.

## Future value

Future value measures how much a present cash flow will be worth in the future. For example, if you put \$1,000 into the bank today, earning 6-percent interest a year, how much will you have ten years from now?

To solve these problems, many students use tables printed in textbooks or financial calculators. You can also solve these problems using the time value of money formula:

Future value = Present value x (1 + interest rate) Years

Present value measures how much money you receive or pay now. Make this figure positive if you re receiving the money and negative if you re paying the money out. Future value is how much you can expect to receive or pay in the future (again, positive for incoming cash, negative for outgoing cash).

The interest rate should be put in as the annual interest rate (rather than daily, monthly, or quarterly). The number of years is for the period of time between the date of the present value and the date of the future value, in years.

Therefore, if present value equals \$1,000, the interest rate is 6 percent, and the number of years is ten years.

Future value = ( \$1,000) x (1 + 0.06) 10

The future value indicates that, if you put \$1,000 away now, earning 6 percent, you can expect to receive \$1,791 at the end of ten years.

## Present value

Present value uses the same formula as future value.

Future value = Present value x (1 + interest rate) Years

Here s an example of how you can use this formula to compute the present value of a cash flow. Suppose that, four years from now, you want to have \$5,000 (that s the future value). How much should you put into the bank today, earning 5-percent interest?

So if you put \$4,114 into the bank today, earning 5-percent interest, then in four years you should have \$5,000 to take out.

Here s a version of the formula to more directly compute present value:

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# Net income formula?

Would you like to merge this question into it?

Would you like to make it the primary and merge this question into it?

The formula is Total Revenue – Total Expenses = Net Income.