ACCTG 221 Chap.7 Master, Cash and Purchases Budgets
Master, Cash and Purchases Budgets
The master budget is a linked model rather than a collection of independent schedules. Sales drive production or purchases; inventory policy connects one period with the next; timing assumptions turn sales and purchases into cash collections and payments. A cash budget then exposes financing needs even when the income budget shows profit.
Each schedule should state its unit, preserve opening and closing balances and feed one clearly labelled amount into the next schedule.
What this chapter covers
- 01
Sales budget as the operating driver
- 02
Production and purchases equations
- 03
Desired ending inventory policy
- 04
Cash collection and payment timing
- 05
Cash budget and financing requirement
- 06
Schedule links and spreadsheet audit checks
Worked example · free
Karangahape Traders: purchases and cash
- +1July cost of sales = 60% × $240,000 = $144,000.
- +2Desired July ending inventory = 25% × (60% × $300,000) = $45,000.
- +2July purchases = $144,000 + $45,000 minus $36,000 = $153,000.
- +2August collections = 70% × $300,000 + 30% × $240,000 = $282,000.
Key terms
- Master budget
- The coordinated set of operating and financial budgets.
- Sales budget
- Expected sales units and revenue for the budget period.
- Purchases budget
- Cost of inventory to buy after allowing for stock policy.
- Cash budget
- Expected cash receipts, payments and financing.
- Inventory policy
- The rule setting desired ending stock.
Master, Cash and Purchases Budgets FAQ
Why can a profitable budget need borrowing?
Profit recognises revenue and expense under accrual timing, while cash depends on collection and payment dates. Rapid growth can require inventory and supplier payments before customers settle their accounts.
What is the purchases equation?
Purchases equal cost of sales plus desired ending inventory minus opening inventory. Every term must use the same cost basis; sales revenue cannot be inserted without first applying the cost percentage.
How should spreadsheet links be checked?
Trace each input to its source schedule, use labelled assumptions, and add proofs for inventory roll-forward and cash movement. A hard-coded duplicate can make one schedule update while another silently remains stale.
Exam move
Lay the schedules left to right in dependency order. Put assumptions in one visible area and never bury collection percentages or inventory policy inside long formulas. For every inventory schedule, write opening plus purchases or production equals use plus ending. For every cash schedule, build timing rows by sales or purchase month so the diagonal pattern is visible.
Check that collection percentages total 100% for a cohort unless the question includes bad debts or a later balance. Reconcile opening cash plus receipts minus payments plus financing with ending cash. When explaining a shortfall, identify its timing cause rather than calling the business unprofitable.
Practise changing one assumption and tracing every affected schedule; that is both an exam skill and the core of a usable spreadsheet. Rebuild one complete three-month model by hand before relying on a spreadsheet. Start with sales units and revenue, then trace production or purchases, inventory balances, cash collections, payments and financing. Put the period label over every column and the measurement unit beside every row.
For collection schedules, follow one sales cohort across months and prove that its percentages total the amount expected to be collected. For payments, keep purchases at cost and separate any lag from the inventory rule. Use opening and desired ending inventory to bridge adjacent periods, which means the last visible period may require next-period demand.
In the cash budget, distinguish operating receipts and payments from financing, interest and minimum-cash policy. If borrowing is required, calculate the amount after all ordinary flows and explain which timing assumption created the trough. Stress-test the model with slower collections, higher demand and a changed inventory target; predict the direction before recalculating.
In spreadsheet practice, colour inputs consistently, avoid duplicate hard-coded assumptions, show checks beside each roll-forward and trace precedents for key outputs. A model that looks polished but lacks reconciliations is difficult to trust. End every budget answer by interpreting liquidity separately from accrual profit and by naming the schedule that management should investigate.
Practise locating the maximum borrowing requirement and the month in which it occurs, then explain the later cash inflow that permits repayment. Check interest timing separately from principal and avoid assuming automatic repayment when the problem does not state it. This converts the cash budget from a list of balances into a financing plan with visible triggers.
Preserve a version of the base assumptions beside each scenario so a favourable cash change can be traced to a real decision rather than an accidental formula edit.
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