Budgeted Financial Statements and the Master Budget WACE Accounting and Finance Unit 4
“Explain how the sales, production, expense and cash budgets combine into a master budget, and prepare a budgeted Income Statement and budgeted Balance Sheet”
A master budget is the full set of interlinked budgets for the period. It starts with the sales budget, which drives the production and purchases budgets, the expense budgets and the cash budget. These feed two summary statements: the budgeted Income Statement, showing expected profit, and the budgeted Balance Sheet, showing the expected financial position at period end. Each budget supplies figures the next one relies on, so they must be prepared in the right order.
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What this dot point is asking
SCSA wants you to explain how the component budgets connect and to prepare a budgeted Income Statement and budgeted Balance Sheet from them.
The order of the master budget
The master budget is a comprehensive set of budgets covering all areas of a business for a future period, comprising operating budgets (sales, production, purchases and expenses), the cash budget, and the budgeted financial statements. Each budget is built from the one before it, so they form a connected plan rather than independent forecasts.
Sales is the starting point because almost everything else depends on expected sales volume. Production or purchases follow, then operating expenses, then the cash budget, and finally the two budgeted statements.
Think of the master budget as a chain in which each link hands figures to the next. The sales budget sets expected revenue and units. The purchases or production budget works out how much to buy or make, allowing for required closing inventory and opening stock on hand. The expense budgets cost the planned level of activity. The cash budget then collects the cash effects of all of these, timing receipts from debtors and payments to creditors. Only once every operating budget is settled can the two budgeted statements be assembled, because they summarise the whole plan. Breaking the order means a later budget is built on figures that do not yet exist.
How the pieces feed the statements
The sales budget supplies budgeted revenue for the Income Statement. The purchases or production budget supplies cost of sales. The expense budgets supply operating expenses. The cash budget supplies the closing cash balance for the Balance Sheet. Non-cash movements, such as depreciation and credit sales still owing, mean budgeted profit and budgeted cash differ, just as they do in actual reporting.
Budgeted financial statements
The budgeted Income Statement follows the normal format using forecast figures: revenue less cost of sales gives gross profit, less operating expenses gives budgeted profit. The budgeted Balance Sheet takes opening balances and applies the budgeted movements: closing cash from the cash budget, closing receivables from credit sales not yet collected, closing inventory from the purchases plan, and closing equity from opening equity plus budgeted profit less budgeted dividends.
Nera Ltd budgets sales of $500 000, of which 70 per cent is collected within the period. Cost of sales is budgeted at 60 per cent of sales. Operating expenses are $90 000 including $10 000 depreciation.
Budgeted gross profit: .
Budgeted profit: .
For the budgeted Balance Sheet, closing receivables include the uncollected 30 per cent of sales: (before considering any opening receivables). Budgeted retained earnings rises by the $110 000 profit, less any budgeted dividend. The $10 000 depreciation reduces profit but is not a cash payment, so it explains part of the gap between budgeted profit and budgeted cash from the cash budget.
Operating budgets versus financial budgets
The master budget is usually split into two groups. The operating budgets plan the trading activities: the sales budget, the production or purchases budget, and the various expense budgets (such as selling and administrative expenses). They culminate in the budgeted Income Statement, which shows the expected profit from operations. The financial budgets plan the financial position and resources: principally the cash budget, along with any capital expenditure plan, culminating in the budgeted Balance Sheet. The distinction matters because the two groups answer different questions. The operating budgets ask whether the business will be profitable; the financial budgets ask whether it will have the cash and the financial structure to support those operations. A business can be budgeting for a healthy profit yet still forecast a cash shortfall, which is exactly why both budgeted statements are prepared rather than the Income Statement alone.
The budgets must follow the dependency order. The cash budget needs receipts from sales and payments for purchases and expenses, which only exist once the sales, purchases and expense budgets are done. Students who jump to the cash budget first have no reliable receipts or payments to enter. Always start with sales and work down the chain.
Exam-style questions
Questions in the style of SCSA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
WACE 2022-style7 marksAldon Ltd budgets sales of $600 000, of which 80 per cent is collected within the period. Cost of sales is budgeted at 55 per cent of sales. Operating expenses are $110 000 including $18 000 depreciation. Prepare the budgeted Income Statement to profit, and explain why budgeted profit will differ from the closing cash figure in the cash budget.Show worked answer →
A 7 mark response needs the budgeted profit and the profit-versus-cash explanation.
Budgeted gross profit. .
Budgeted profit. .
Why profit differs from cash. Two reasons stand out. First, only 80 per cent of sales is collected in the period, so of revenue is in profit but not yet in cash (it sits in budgeted receivables). Second, the $18,000 depreciation reduces budgeted profit but is a non-cash item, so it does not appear in the cash budget at all. Budgeted profit is an accrual figure, while the cash budget tracks only cash movements. Markers reward the correct profit and at least the credit-sales and depreciation reasons for the gap.
WACE 2023-style5 marksExplain why the budgets in a master budget must be prepared in a particular order, naming the budget that must come first and the budgets that depend on it.Show worked answer →
A 5 mark response needs the dependency logic and the order.
First budget. The sales budget comes first, because expected sales volume drives almost every other budget.
Dependencies. The production or purchases budget depends on sales (you produce or buy to meet expected demand plus required inventory). The expense budgets depend on the planned level of activity. The cash budget depends on the sales, purchases and expense budgets, because it needs the receipts and payments those budgets generate. The budgeted Income Statement and Balance Sheet come last, summarising everything. Preparing the cash budget before the sales budget is impossible, because there are no reliable receipts or payments to enter. Markers reward sales first and a correct chain of dependent budgets ending in the budgeted statements.