Part of the cash budget is based on information drawn from the capital expenditures budget. True or False. The sales budget is derived from the production budget. True or False.
The Correct Answer and Explanation is:
- True – Part of the cash budget is based on information drawn from the capital expenditures budget.
Explanation:
The cash budget is a financial plan that outlines expected cash inflows and outflows over a specific period. It helps a company manage its liquidity and ensure it has enough cash to meet obligations. The capital expenditures budget outlines the company’s planned investments in long-term assets, such as property, equipment, and machinery. Since capital expenditures involve large cash outflows, the capital expenditures budget directly influences the cash budget. These outflows need to be accounted for in the cash budget to ensure the company can allocate enough cash to make these investments without jeopardizing its short-term operations.
- False – The sales budget is not derived from the production budget.
Explanation:
The sales budget outlines the expected sales volume and revenue for a period. It is typically based on market conditions, historical sales trends, and sales forecasts. The production budget, on the other hand, specifies the quantity of goods that must be produced to meet the sales demand and inventory needs. While the production budget is influenced by the sales budget (because the company needs to produce enough to meet the expected sales), the sales budget is not derived from the production budget. Instead, the sales budget is a starting point that guides the preparation of the production budget. The production budget will then adjust based on the sales forecast and the need to maintain or increase inventory levels. Thus, the production budget is a response to the sales budget, not the other way around.
