Final answer:
The income statement is designed to show if a business is making a profit or not, which is essential as profits are what determine a business's viability and continuity.
Step-by-step explanation:
The financial statement whose purpose is to reveal whether a business is earning a profit or losing money is the income statement, also known as the profit and loss statement. The income statement provides a summary of the company's revenues and expenses over a specific period, usually a fiscal quarter or year. The profit formula is Profit = Total Revenue - Total Cost.
When total revenue exceeds total costs, the business is profitable. Conversely, if costs exceed revenues, the company incurs a loss. Understanding this is critical for businesses because profits are essential for a company to sustain operations and grow.
Firms can cease to exist if they consistently fail to make a profit, as profit is a measurement that determines whether a business stays operating or not. Privately owned firms aim to earn profits, and the difference between revenues and costs is where profit is realized. While accounting profit includes only explicit costs, economic profit includes both explicit and implicit costs.