Technical / Accounting
Net Income
Net income explained: the bottom line profit after all expenses, taxes, and interest. Formula, components, and interview anchors.
"Earnings can be pliable as putty when a charlatan heads the company." — Warren Buffett
Concept
Net income is the final profit after subtracting all expenses from revenue. It's the literal bottom line of the income statement—what shareholders actually earned. This number flows into retained earnings on the balance sheet and serves as the starting point for the cash flow statement.
Intuition
Net income answers one question: Did the owners make money this period?
- It's accrual-based, not cash-based. A company can report positive net income while bleeding cash (or vice versa).
- It's after everyone else gets paid: suppliers, employees, landlords, lenders, government. Shareholders eat last.
- It's the starting point for EPS, which drives stock prices. Miss consensus net income estimates and watch the stock crater.
Components
Gross Profit
What It Is
Revenue minus the direct costs of producing goods or services. Measures production efficiency before overhead.
How to Calculate It
COGS includes raw materials, direct labor, and manufacturing overhead—costs that scale directly with production.
Key Consideration
Interview Script
Net Income is the final profit remaining after subtracting all expenses from revenue—it's literally the bottom line of the income statement and represents what shareholders actually earned. It's accrual-based, not cash-based, so a company can report positive net income while still burning cash. This number flows into retained earnings on the balance sheet, serves as the starting point for the cash flow statement, and drives EPS, which is why missing net income estimates can crater a stock.