The last equation in the income statement is:

Operating Income - Interest - Taxes = Net Income 📊

Remember, Operating Income is also known as Earnings before Interest and Taxes, so by subtracting Interest and Tax expenses, you just end up with Earnings, or the REAL profit! 💡

As you’ve learned before, interest is the fee that a company or individual pays for borrowing money 💳

Let’s say that our T-shirt company took out a $5,000 loan with a 10% annual interest rate to buy a new factory 🏭

In this case, they would pay an interest expense of $5,000 x 10% = $500 💸

So with operating income of $4,000 their profit prior to taxes is $4,000 - $500 = $3,500

After earnings before taxes, you just need to subtract tax expenses to get to Net Income 🧾

But how do we calculate how much tax a company has to pay?

Well, just take the tax rate and multiply it by the earnings before taxes! 🔢

If the tax rate were 30%, our T-shirt company would pay taxes of $3,500 x 30% = $1,050 🧮

And finally, you can subtract this tax expense from the earnings before taxes to get Net Income:

$3,500 - $1,050 = $2,450, so the company’s Net Income was $2,450! 🎉

Net Income can also be expressed as a percentage of Revenue to get Profit Margin (or Net Margin)

In this case, the company’s Profit Margin would be $2,450 ➗ $10,000 = 24.5% 💹

This means that after we’ve accounted for all the different expenses that the T-shirt company has to pay, they finally get to keep 24.5% of their revenue as profit! 🏦