1. Describe budgeting and its potential benefits. The budget is a financial plan that guides the future operations of a business. The budgeting process usually entails several rounds of review, revision, and negotiation across the entire organization. Budgets can help companies plan and organize their operations, coordinate and control their business processes, communicate plans, and motivate employees. However, budgeting does have some limitations that managers must understand in order to use budgets effectively. For example, budgets often oversimplify economic reality. They also can undermine managers' initiative by discouraging new developments. Finally, managers often focus on budget results rather than on the reasons for the results.
   
   
2. Define the master budget and discuss its components. The master budget is a set of financial reports that describe a company's operating plans for a specific future fiscal period. A master budget is usually composed of four separate budget schedules that address operations, cash flow, capital usage, and financial statement reporting. Operating budgets detail the expected financial outcomes arising from a firm's business processes. Cash flow budgets summarize a company's expected cash receipts and payments arising from operating, investing, and financing activities. Capital use budgets describe a firm's planned investment activities in new plant facilities, equipment, products, locations, and other long-term operating activities. Financial statement budgets summarize the data from all the other budgets into pro forma financial statements.
   
   
3. Illustrate the development of the operating budget. Preparation of the operating budget starts the budget process. The operating budget generally includes three distinct parts: the sales or revenue budget, the operating expense budget, and the inventory purchases budget. These forecasts define the resources needed to execute basic business processes to meet customer demand. The operating budgets give managers preliminary insight into the anticipated profitability of the firm.
   
   
4. Demonstrate the creation of the cash flow and capital use budgets. Cash flow is critical to a firm's success and survival. A company must have enough cash to meet its obligations or it will fail. The cash flow budget is a useful monitoring tool that details cash receipts and payments. The cash flow budget differs from the operating budget because of differences between cash and accrual accounting. Managers rely on cash flow budgets to ensure that employees, suppliers, and creditors are paid on a timely basis. The cash flow budget is the foundation for the pro forma statement of cash flows.
   
   
5. Discuss the preparation of pro forma financial statements. Pro forma financial statements or financial statement budgets are prepared using data from all the other budgets. Companies prepare balance sheets, income statements, and statements of cash flows using formats consistent with generally accepted accounting principles. These budgeted financial statements represent the end of the budgeting process and give users insight into the expected outcomes of the business.