Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
The correct answer and explanation is :
The correct answer is d. revenues exceed expenses.
Explanation:
Net income (or net profit) is the amount of money a company earns after all its expenses have been subtracted from its revenues. It is a key indicator of a company’s financial performance over a specific period, such as a quarter or a year. To calculate net income, the formula is:
[
\text{Net Income} = \text{Revenues} – \text{Expenses}
]
Revenues are the earnings a company receives from its primary business activities, such as sales of products or services. Expenses are the costs incurred to produce goods or services and operate the business, including costs like salaries, rent, utilities, and depreciation.
When revenues exceed expenses, the result is positive net income. This means that the company has made a profit after covering all of its costs, which is a favorable financial outcome. This positive net income is often reinvested into the business, used to pay dividends to shareholders, or saved for future operations.
On the other hand, if expenses exceed revenues, the company incurs a net loss. This means the company spent more on operating costs than it earned from its sales or services, which is a negative financial outcome that can harm the company’s financial health and its ability to continue operations if the trend persists.
Now, let’s review the other options:
- a. assets exceed liabilities: This statement refers to the financial position of a company (its balance sheet), not directly to net income. If assets exceed liabilities, the company has positive equity, but this doesn’t directly indicate whether the company is making a profit or loss.
- b. assets exceed revenues: This is not a meaningful comparison for determining net income, as assets and revenues are different types of financial measures.
- c. expenses exceed revenues: This describes a scenario where the company is operating at a loss, not generating positive net income.
Thus, net income occurs when revenues exceed expenses.