Multiple Choice
Which of the following is the correct first step when preparing a statement of cash flows using the indirect method?
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13. Statement of Cash Flows
Introduction to the Statement of Cash Flows
Multiple Choice
Which of the following best describes the components of a master budget?
A
A single budget that focuses solely on cash flows from operations
B
A comprehensive set of budgets including the operating, capital expenditure, and financial budgets
C
Only the cash budget and the sales budget
D
A summary of only the company's investing and financing activities
Verified step by step guidance1
Step 1: Understand the concept of a master budget. A master budget is a comprehensive financial planning document that includes various interconnected budgets, providing a complete overview of a company's financial activities for a specific period.
Step 2: Identify the components of a master budget. It typically includes the operating budget (e.g., sales, production, and expense budgets), the capital expenditure budget (e.g., planned investments in assets), and the financial budget (e.g., cash budget, budgeted income statement, and budgeted balance sheet).
Step 3: Analyze the options provided in the question. Evaluate each option to determine whether it accurately describes the components of a master budget.
Step 4: Eliminate incorrect options. For example, 'A single budget that focuses solely on cash flows from operations' is incorrect because a master budget is not limited to cash flows. Similarly, 'Only the cash budget and the sales budget' is incorrect because a master budget includes more than just these two components. 'A summary of only the company's investing and financing activities' is also incorrect because the master budget encompasses operating activities as well.
Step 5: Select the correct answer. Based on the analysis, the correct description of a master budget is 'A comprehensive set of budgets including the operating, capital expenditure, and financial budgets.'
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