Connection Between Section 5 and 6

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  • #226814
    Inam
    Participant

    Dear Sir,

    Please elaborate on the connection between Section – 5 and 6

    what I got is:
    Master Budget broadly includes all of the operating budgets +Capital Expenditure Budget along with Income statement in which those are incorporated+Cash Budget+Budgeted Balance Sheet (Please confirm the order also)

    Forecasting is done after the operating budget 

    Please simply explain different forecasts 

    After that at last different ratios are analyses for decision making

    Please demonstrate/correct the above

    Regards,

    Inam Sibhai

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  • #226821
    Lynn Roden
    HOCK international

    Hello Inam,

    The master budget is a complete set of budgeted financial statements: balance sheet, income statement, and statement of cash flows, usually developed for every month of the coming budget period (usually a year). The order of the preparation of the individual budgets that go into the development of the master budget is given in your CMA Part 1, Vol. 1 book.

    Forecasting, such as making sales revenue forecasts, must be done before any budgeting can be done because the forecasts are the basis of the budgeted amounts. I am sorry, but I do not understand your request to “Please simply explain different forecasts.” Forecasting is explained in your book along with many examples, and I cannot add anything to what is in your book.

    Calculation of ratios may be done when the master budget is still in a draft form (that is, not yet approved and finalized), as part of the review to determine whether the plans for the coming budget period and their financial expression in the budget are satisfactory. If the expected financial results of the coming period’s plans, as indicated by ratios and other reviews, are not satisfactory, then changes need to be made in the plans and the budget for the coming budget period before the budget is approved. However, financial statement analysis is a topic covered and tested on the CMA Part 2 exam. For the Part 1 exam, it is lightly covered in the topic of Top-Level Planning only.

    The preparation of pro forma financial statements discussed in the Top-Level Planning topic is a different process from the process of developing the master budget. Development of a pro forma financial statement is outside of the master budget development process. As it says in your book, “pro forma financial statements are not a part of the formal budgeting process. They are used for planning and decision-making purposes, and the amounts in them may be quite different from the amounts in the master budget.”

    Lynn

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