Business Degree Certification Practice Test

Which of the following statements regarding the Cash Budget is NOT correct?

1. It is not necessary to prepare any other budgets

2. The Cash Budget should precede the Budgeted Income Statement

3. The Cash Budget should precede the Budgeted Balance Sheet

4. The Cash Budget builds on earlier budgets

The correct answer is: It is not necessary to prepare any other budgets

The statement that is not correct regarding the Cash Budget is that it is not necessary to prepare any other budgets. While the Cash Budget is essential for managing cash flow and ensuring that a business has sufficient funds to meet its obligations, it is typically prepared in conjunction with other budgets. Other budgets, such as the Sales Budget, Production Budget, and Operating Expenses Budget, provide essential input to the Cash Budget, as these budgets help to estimate cash inflows and outflows. For example, the Sales Budget will indicate expected cash receipts from customers, while the Production Budget will inform on cash disbursements related to manufacturing. Thus, preparing a comprehensive set of budgets is crucial for a complete financial picture and effective strategic planning. In contrast, the Cash Budget understandably needs to be developed in sequence to the Budgeted Income Statement and the Budgeted Balance Sheet, as both these financial statements rely on the information provided by the Cash Budget and the broader set of budgeted figures. Therefore, asserting that no other budgets are necessary misrepresents the collaborative nature of budget preparation in a business context.