Definitions of Financial Statements

June 23, 2016

In business, budgeting is an important tool used for planning, decision-making, monitoring business performance, and forecasting expenditure and income. Effective budgeting can help businesses efficiently manage limited resources as well as plan for expansion.
A master budget is a combination of a business’s budgets of production costs, incomes, purchases, sales, and includes pro forma financial statements. A master budget is a planning document, which includes both operational and financial budgets within a fiscal year. It can be a continuing document from year to year by adding a month to the end. The master budget is used as a planning tool for management to plan strategic long-term or current year business activities. For example, if a company was contemplating an expansion, management could use the master budget to review debit limits, cash flow, or expected sales before making a final decision.
Individual budgets can change depending on the type of business but they usually fall under one of two main parts of the master budget, operational and financial budgets each have their own components. The operational budget displays the projected income-generated activities of the company, including expected costs and expenses. This budget consists of sales budget, sales forecast, direct material purchases, direct labor budget, overhead budget, finished goods inventory budget, and cost of goods sold.   The sales budget portion shows a company’s sales expectation for that budgeting period.
The financial budget displays the projected income and expenses of cash of a company’s financial position. This budget consists of the cash budget, pro-forma financial statement, and the budget for capital expenditures. The cash budget portion shows the pattern of how cash is paid out and taken in over a specified time like, month or quarter. The capital expenditure budget portion shows a company planned capital expenditures...