Which of the following statements is correct regarding the components of the master budget?

• A. The master budget is prepared after the financial statements are finalized.
• B. The master budget includes both operating and financial budgets.
• C. The master budget excludes the budgeted balance sheet.
• D. The master budget only consists of the cash budget.

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 all aspects of an organization's operations and finances. It serves as a blueprint for achieving financial goals during a specific period.
2. Identify the components of the master budget: The master budget typically consists of two main categories: operating budgets (e.g., sales budget, production budget, and expense budgets) and financial budgets (e.g., cash budget, budgeted income statement, and budgeted balance sheet).
3. Clarify the relationship between the master budget and financial statements: The master budget is prepared before the financial statements are finalized, as it provides the framework for estimating future financial performance and position.
4. Evaluate the incorrect options: The master budget does not exclude the budgeted balance sheet; instead, the budgeted balance sheet is a key component of the financial budget. Similarly, the master budget is not limited to the cash budget; it includes various other budgets as part of its structure.
5. Conclude with the correct statement: The correct statement is that the master budget includes both operating and financial budgets, as these are essential components for comprehensive financial planning.