Future Business Leaders of America (FBLA) Agribusiness Practice Test

What is the formula for calculating net income?

1. Revenue plus expenses

2. Revenue minus expenses

3. Gross pay minus taxes

4. Operating costs plus net pay

The correct answer is: Revenue minus expenses

Net income is a key financial metric that represents the profit of a business after all expenses, taxes, and costs have been deducted from total revenue. The correct formula for calculating net income is revenue minus expenses. This formula reflects how much money is left over after all the costs associated with running the business have been subtracted from the income generated through sales. Understanding this is foundational to assessing a company’s financial health. By knowing the total revenue (money earned from sales) and subtracting all the relevant expenses (such as cost of goods sold, operating expenses, taxes, and any other costs), one can arrive at the net income figure, which is critical for stakeholders including management, investors, and analysts. The other options do not accurately reflect the calculation of net income. For example, simply adding revenue and expenses would not provide a useful measure of profitability. Similarly, gross pay minus taxes and operating costs plus net pay do not pertain to the calculation of net income. Each of these concepts is important in its own right but does not relate directly to determining overall net income.