Textbook Problem

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While many small firms do not put together a complete master budget, nearly every firm creates a cash budget. Why do you think that is so?

To determine

Describe the reason for preparing cash budget by most of the firms where many firms don’t prepare master budget.

Explanation of Solution

Master Budget: The master budget is the core budget that describes the full process of budget. This budget shows all the operating and financial budgets of the company for a budgeted accounting period and this budget includes all the budgets and budgeted financial statements.

Cash Budget: The cash budget is a part of the financial statements which is a plan for the cash receipts and expenses for a particular accounting period. This budget gives an estimation of all the cash inflows and outflows of a business for the given financial period.

Generally, small types of firms are not regularly involved in a comprehensive master budgeting process but this assumption is a mistake one. The budgeting process helps all level of management to plan ahead, and formalize the objective of the management on recurring basis...