CPA Financial Reporting 2025 – 400 Free Practice Questions to Pass the Exam

Net income is calculated as the difference between revenues and expenses. This formula reflects the fundamental concept of profitability in financial reporting: it shows how much a company earns after accounting for all costs associated with generating its revenue.

Revenues represent the income generated from normal business operations and other activities, while expenses are the costs incurred to generate those revenues. By subtracting total expenses from total revenues, one arrives at net income, which serves as a key indicator of a company's financial health over a specific period. A positive net income indicates that the business is profitable, while a negative net income suggests a loss.

The other calculations mentioned do not pertain to net income. The equation relating assets and liabilities describes a company's balance sheet position (not its profitability). Similarly, subtracting liabilities from equity gives an incorrect view as equity itself is not derived in this manner. Thus, the proper understanding and calculation of net income hinges on the relationship between revenues and expenses.