Question

Cash budgets must be prepared before the operating income budget. Do you agree? Why?

1) Yes, because cash budgets provide information about the cash inflows and outflows that are necessary for preparing the operating income budget.
2) No, because the operating income budget is prepared before the cash budget to determine the expected revenue and expenses.
3) Cannot be determined without further information.
4) Not applicable.

Answer 1

The correct answer is option 1 Yes, because cash budgets provide information about the cash inflows and outflows that are necessary for preparing the operating income budget.

Step-by-step explanation:

A cash budget is a financial statement that projects cash inflows and outflows over a specific period of time. It helps a business to manage its cash flow and plan for potential surpluses or deficits.

In the process of preparing a cash budget, the company estimates its expected cash inflows from various sources such as sales, loans, and investments. It also considers its expected cash outflows, including expenses, loan repayments, and dividends.

Once the cash budget is prepared, it provides crucial information for the operating income budget. The operating income budget is a financial statement that estimates the expected revenue and expenses of a business. It helps the company plan its operations and evaluate its profitability.

Therefore, it is correct to say that cash budgets must be prepared before the operating income budget.