Question

Which of the following describes the normal sequence followed in preparing a master budget? Multiple Choice

1. Sales budget → Selling and administrative expense budget → Inventory purchases budget → Cash budget
2. Sales budget → Inventory purchases budget → Selling and administrative expense budget → Cash budget
3. Cash budget → Sales budget → Selling and administrative expense budget → Inventory purchases budget
4. Selling and administrative expense budget → Sales budget → Inventory purchases budget → Cash budget

Answer 1

Answer: The correct answer is "2. Sales budget → Inventory purchases budget → Selling and administrative expense budget → Cash budget".

Explanation: Sales budget → Inventory purchases budget → Selling and administrative expense budget → Cash budget is the normal sequence followed in preparing a master budget.

First, sales must be planned, to estimate what level of income will be obtained, then purchase expenses directly related to sales, thirdly, other sales and administrative expenses and finally the cash budget.