Florida Building Contractor Business/Finance Practice Exam

In financial accounting, what is another term often used for net profit?

1. Gross profit

2. Operating income

3. Net income

4. Cash flow

The correct answer is: Net income

Net profit is commonly referred to as net income in financial accounting. This term represents the amount of money that remains after all expenses, taxes, and costs have been deducted from total revenue. It provides a clear picture of a company's profitability for a specific period and is crucial for assessing the financial health of the business. Understanding net income is fundamental because it reflects the company's true earnings, which can influence investor decisions, company valuations, and future financial planning. This figure is often used in various financial ratios, such as return on equity and profit margins, to evaluate the efficiency and profitability of a company. Net profit/net income is distinct from gross profit, which does not account for operating expenses or taxes, as well as operating income, which excludes non-operating income and expenses. Cash flow, on the other hand, pertains to the liquidity position of a business and its ability to generate cash, which is separate from profitability measured by net income.