Which of the following are principal components of a master budget?

• A. General ledger, subsidiary ledger, and journal entries
• B. Operating budget, financial budget, and capital expenditure budget
• C. Cash flow statement, retained earnings statement, and tax return
• D. Trial balance, income statement, and balance sheet

Answer: (B)

Verified step by step guidance

1. Understand the concept of a master budget: A master budget is a comprehensive financial planning document that includes various individual budgets, which together provide a complete picture of an organization's financial activities for a specific period.
2. Identify the principal components of a master budget: The master budget typically consists of three main components: the operating budget, the financial budget, and the capital expenditure budget.
3. Clarify the purpose of each component: The operating budget focuses on day-to-day operations and includes budgets like sales, production, and operating expenses. The financial budget includes the cash budget and budgeted financial statements (e.g., budgeted income statement and balance sheet). The capital expenditure budget outlines planned investments in long-term assets.
4. Eliminate incorrect options: Review the provided options and eliminate those that do not align with the components of a master budget. For example, 'general ledger, subsidiary ledger, and journal entries' are accounting records, not components of a master budget. Similarly, 'cash flow statement, retained earnings statement, and tax return' are financial reports, not budget components.
5. Select the correct answer: Based on the understanding of the master budget's components, the correct answer is 'Operating budget, financial budget, and capital expenditure budget.'