Corporate Finance For Dummies
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The net income portion of the income statement, which lists costs and revenues, is called net income and deals exclusively with taxes and interest. A company has to pay the taxes and interest charges that appear in this section, but the amounts due are often related to the amount of money the company makes.

As a result, the company has to account for all other expenses and revenues before it can calculate these final items and determine the company’s total profits. Here’s a breakdown of what goes into net income:

  • Interest income: A company can earn interest when it has some types of bank accounts, when it owns bonds or other forms of debt on individuals or companies, or when it purchases money-market investments like certificates of deposit. All this interest falls under interest income on the income statement.

  • Interest expense: A company can generate interest expense when it borrows money from a bank or other organization or when it issues bonds. All the interest that a company pays, regardless of where the interest expense comes from, goes into the interest expense portion of the income statement.

  • Income tax expense: Like people, companies must pay taxes on the income they generate. The amount of income taxes a company pays is based on their EBT (earnings before tax, but not interest). So if a company makes $100 in a tax year and it has to pay 6 percent in income tax, then it has to pay $6.

    Many companies also list the percentage of income taxes in this section, but it isn’t required.

Net income is calculated by taking EBIT and subtracting all interest and tax expense. Simply put, the net income is the final amount that a company walks away with after it has considered all costs. It includes all revenues and all costs and represents the final profits that a company was able to generate during the period.

The company must either distribute the money from net income to its stockholders (who own the company) or reinvest it into the company for improvements and expansion. Either way, the money from net income belongs to the company owners and must contribute to the value of their ownership in the company.

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Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.

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