Future Business Leaders of America (FBLA) Accounting Practice Test

How is net income defined?

1. The difference between total revenue and total expenses when expenses exceed revenue

2. The difference between total revenue and total expenses when revenue exceeds expenses

3. The total revenue after expenses have been deducted

4. The total expenses before revenue is added

The correct answer is: The difference between total revenue and total expenses when revenue exceeds expenses

Net income is specifically defined as the difference between total revenue and total expenses when revenue exceeds expenses. This concept reveals the profitability of a business over a given period. When revenue exceeds expenses, the result is a positive figure, indicating that the business has earned more than it has spent. This positive outcome is what is referred to as net income. Understanding net income is crucial for businesses and investors alike as it serves as an indicator of the financial performance and health of an organization. It reflects the efficiency of a company in managing its operations and is a key measure in financial reporting. The other options reflect different aspects of revenue and expenses but do not accurately define net income. For example, discussing the scenario where expenses exceed revenue would lead to a net loss, which is not the focus of the definition of net income. Similarly, mentioning total revenue after expenses or just total expenses in relation to revenue does not capture the essence of net income, which is fundamentally rooted in the comparison and outcome when revenues surpass expenses.