Final answer:
Financial statements are prepared directly from the adjusted trial balance, which includes all financial account balances after adjustments. This ensures that debits and credits are balanced, allowing for the creation of accurate financial statements such as the income statement and balance sheet.
Step-by-step explanation:
The financial statements can be prepared directly from the adjusted trial balance. The adjusted trial balance is a statement that lists all the accounts of a company and their final balances after all adjustments have been made. This includes adjustments for items such as accrued expenses, prepaid expenses, and depreciation. The adjusted trial balance ensures that the total debits equal the total credits, which is a fundamental requirement for the accuracy of the financial statements.
From the adjusted trial balance, the income statement items such as revenues and expenses are deducted to calculate net income or loss. Following that, the balance sheet accounts like assets, liabilities, and owner's equity are organized to reflect the company's financial position. In some cases, the statement of cash flows might be derived from the changes in the balance sheet accounts, supplemented by the detailed income statement and additional information.