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Yocto compiles everything from source code. Following are the stages yocto following to prepare binaries / packages from the source code.

The above diagrams are self explanatory to understand how yocto works conceptually and build everything from the source code.
Supported types of packages by Yocto
- deb for debian style deb files
- ip’ for ipk files are used by opkg (a debian style embedded package manager)
- rpm for rpm style packages