How is net income calculated?

Net income is calculated by subtracting total expenses from total revenues. This metric reflects the profitability of a business over a specific period, such as a quarter or a year. Revenues are the total income generated from normal business operations, while expenses include all costs incurred in generating that income, such as operating expenses, interest, and taxes.

When you take the total revenues and deduct the total expenses, the resulting figure indicates how much money the business has earned (or lost) after all costs have been accounted for. This calculation is essential for assessing financial performance, making strategic decisions, and validating the business's sustainability in the long term.

The other options do not accurately represent how net income is derived; for example, adding assets and liabilities pertains to balance sheets rather than income computation, while multiplying total sales by profit margin is a different financial calculation used to estimate possible net income, and averaging income over a period doesn't provide the specific accounting method for net income.