Fill In The Blank | Net Income Is Calculated Using The Following Formula
Net income is transferred to Statement of Owners’ Equity where it is added
to opening retained earnings for the period. In case of net loss, it is deducted
from opening retained earnings in statement of retained earnings. In case of
Net loss, no dividend is distributed to shareholders during the current
accounting period.
Net income / net profit shows that the company’s business is performing
well in meeting daily expenses and earning revenues for the current accounting
period. This performance affects the decision-making process of the investors
and shareholders. For investors, they are more willing to invest in that
company which show higher net profit as compare to its competitors in the market.
For example, if company A has net income for the accounting period is $9,000,
while its competitor company B has $5,000, then the investors should choose the
company A, as it is performing well and better than its competitor B due to
higher net profit ($4,000 more than the company B).
Shareholders are also more interested to buy shares of company B as they have
greater chance to get fair return on the purchase of shares from the company by
selling shares in the stock market when the share value of company B rises.
Net income ensures the stability of the business as the business easily meet all of its expenses from all of the revenues for the period. Also if a company wants to grow and expand the business, then it should focus on increasing its Net income for the period as it is added to opening retained earnings and ultimately increase the final value of retained earnings which can be used for growing and expansion of the business.
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