How is the income statement prepared from the adjusted trial balance?

• A. List revenues and expenses from the adjusted trial balance to compute net income, then close these accounts to Retained Earnings.
• B. List assets and liabilities to compute net income.
• C. Prepare by listing equity accounts only.
• D. Start with cash flows and adjust profits.

Answer: (A)

The income statement shows the period’s operating results by using the revenue and expense balances from the adjusted trial balance. You take all revenue accounts and all expense accounts, compute net income (revenues minus expenses), and report those totals to show the period’s profitability. After calculating net income, you close the revenue and expense accounts to Retained Earnings, transferring their balances and resetting those accounts to zero for the next period. The adjusted trial balance provides the exact figures after adjusting entries, ensuring the statement reflects true activity for the period. Balance sheet items like assets and liabilities aren’t used to prepare the income statement, and the cash flow statement is a separate report that starts from net income, not the income statement itself.