Which financial statement is primarily used to determine the profitability of a business?

The Income Statement is primarily used to determine the profitability of a business because it summarizes the revenues, costs, and expenses incurred during a specific period of time. This financial statement provides a clear picture of how much money the company has made (or lost) through its operations by showing the net profit or loss. By presenting details on sales, gross profit, operating expenses, and other income and expenses, the Income Statement allows stakeholders to assess how effectively the company is generating profit from its business activities.

In contrast, the Balance Sheet provides a snapshot of the company’s financial position at a specific point in time, detailing assets, liabilities, and equity but not revealing profitability over a period. The Cash Flow Statement tracks the flow of cash in and out of the business across operating, investing, and financing activities, which is important for understanding liquidity but does not directly indicate profitability. The Statement of Changes in Equity shows how equity changes over time but also does not focus on profitability. Thus, the Income Statement is the key financial statement for evaluating a company's performance in terms of profitability.