Multiple Choice
When developing a pro forma income statement, which of the following is most directly used to estimate cash flows from operating activities on the statement of cash flows?
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13. Statement of Cash Flows
Introduction to the Statement of Cash Flows
Multiple Choice
4. What is one reason why a company should prepare an operating budget?
A
To estimate future cash inflows and outflows from day-to-day business activities
B
To record historical cash transactions for external reporting
C
To calculate the company's income tax liability
D
To determine the fair value of company assets
Verified step by step guidance1
Understand the purpose of an operating budget: An operating budget is a financial plan that estimates the revenues and expenses for a specific period, typically a fiscal year. It focuses on day-to-day business activities and helps in planning and decision-making.
Analyze the options provided in the question: Each option represents a potential reason for preparing an operating budget. Evaluate whether each option aligns with the primary purpose of an operating budget.
Option 1: 'To estimate future cash inflows and outflows from day-to-day business activities' - This aligns with the purpose of an operating budget, as it helps businesses forecast their financial performance and manage resources effectively.
Option 2: 'To record historical cash transactions for external reporting' - This is not the purpose of an operating budget. Historical cash transactions are typically recorded in financial statements, not in budgets.
Option 3: 'To calculate the company's income tax liability' and Option 4: 'To determine the fair value of company assets' - These are unrelated to the purpose of an operating budget. Tax liability is calculated based on taxable income, and asset valuation is part of financial reporting or appraisal processes.
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