Study guide
5.3 The Master Budget: Budgeted Profit or Loss, Financial Position and Cash Flow
CIMA BA2: Fundamentals of Management Accounting Exam
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1 Chapter 1: The Context of Management Accounting
1.1 The Need for Management Accounting, the GMAP Definition & Comparison with Financial Accounting 1.2 Qualities of Good Management Information: From Data to Decisions 1.3 Information for Operational, Managerial and Strategic Levels 1.4 The Role of the Management Accountant: CIMA's View, IFAC's Domain & Position in the Organisation 1.5 CIMA as a Professional Body: Members, Candidates, the Profession & Society
2 Chapter 2: Cost Identification, Classification and Behaviour
2.1 Cost Classification by Nature, Function, and Element 2.2 Cost Behaviour Patterns and Relevant Range 2.3 The High-Low Method and Cost Prediction 2.4 Scattergraph and Least-Squares Regression for Cost Estimation
3 Chapter 3: Overheads and Absorption Costing
3.1 Production Overheads: Allocation and Apportionment 3.2 Overhead Absorption Rates (OAR) & Under/Over-Absorption
4 Chapter 4: Marginal Costing, Profit Reconciliation and Cost-Based Pricing
4.1 Marginal Costing vs Absorption Costing Principles 4.2 Reconciling Marginal and Absorption Costing Operating Profits 4.3 Pricing with Cost Information: Full-Cost-Plus, Marginal-Cost-Plus, Mark-Ups, Margins and Return Targets
5 Chapter 5: Budget Preparation: Functional, Master and Cash Budgets
5.1 Purposes of Budgeting & The Budgeting Process 5.2 The Principal Budget Factor & Functional Budgets 5.3 The Master Budget: Budgeted Profit or Loss, Financial Position and Cash Flow 5.4 Cash Budgets & Cash Flow Forecasting
6 Chapter 6: Budgetary Control: Flexible Budgets, Behaviour and Budgeting Approaches
6.1 Fixed vs Flexible Budgeting and Budget Flexing 6.2 Budgetary Control Systems, Participation & Behavioural Aspects 6.3 Alternative Budgeting Approaches: Incremental, ZBB & Rolling Budgets
7 Chapter 7: Standard Costing and Cost Variances
7.1 Standard Costing Principles and Types of Standards 7.2 Direct Material Price and Usage Variances 7.3 Direct Labour Rate, Efficiency, and Idle Time Variances 7.4 Variable and Fixed Overhead Variances
8 Chapter 8: Sales Variances, Operating Statements and Interpreting Variances
8.1 Sales Variances and Operating Statements (Marginal and Absorption Formats) 8.2 Interpreting Variances: Causes, Interrelationships and Deciding What to Investigate
9 Chapter 9: Performance Measurement
9.1 The Need for Performance Measures: Responsibility Accounting, Controllability and Service Industries 9.2 Financial and Non-Financial Performance Measures in Manufacturing and Service Organisations
10 Chapter 10: Integrated Accounts, Job and Batch Costing and Management Reports
10.1 Integrating Cost and Financial Accounts: Control Accounts and the Manufacturing Account 10.2 Integrated Ledgers with Under- and Over-Absorption and Standard Cost Variances 10.3 Job and Batch Costing: Job Cost Cards, Job Accounts and Pricing a Job 10.4 Cost Reports for Manufacturing, Service and Not-for-Profit Organisations
11 Chapter 11: Risk, Probability and Statistics for Decision-Making
11.1 Risk, Uncertainty and Probability: Rules and Joint Probabilities for Decisions 11.2 Expected Values, Expected Value Tables and Their Limitations 11.3 Averages and Dispersion: Mean, Median, Mode, Range, Variance, Standard Deviation and Coefficient of Variation 11.4 The Normal Distribution: Z-Scores, Normal Distribution Tables and Business Probabilities
12 Chapter 12: Relevant Costing and Short-Term Decisions
12.1 Relevant Cost Concepts: Future, Incremental, and Opportunity Costs 12.2 Relevant Costs of Materials, Labour, and Overheads 12.3 Short-Term Operational Decisions: Make-or-Buy, Shutdowns, Special Orders
13 Chapter 13: Breakeven Analysis and Limiting Factor Analysis
13.1 Single-Product Break-Even Analysis & Margin of Safety 13.2 Target Profit Calculations, Operating Gearing & CVP Assumptions 13.3 Multi-Product CVP Analysis & Break-Even Charts 13.4 Limiting Factor Analysis (Key Factor Analysis)
14 Chapter 14: Long-Term Decisions: Time Value of Money, Payback, NPV and IRR
14.1 Time Value of Money: Compounding, Discounting, Annuities & Perpetuities 14.2 Payback Period Method: Constant and Uneven Cash Flows 14.3 Net Present Value (NPV): Methodology and Decision Rules 14.4 Internal Rate of Return (IRR) and Interpolation
5.3 The Master Budget: Budgeted Profit or Loss, Financial Position and Cash Flow
Key Takeaways Explain This Topic AI
The master budget consists of a budgeted statement of profit or loss, a budgeted statement of financial position and a budgeted cash flow forecast.
Cash received from customers equals opening receivables plus credit sales minus closing receivables; payments to suppliers follow the same logic using payables.
Depreciation reduces budgeted profit but not budgeted cash, so it is added back when reconciling operating profit to operating cash flow.
Closing retained earnings equal opening retained earnings plus budgeted profit minus dividends, and the budgeted statement of financial position must balance.
Last updated: September 2026
Why this topic is examined
Syllabus area C1(c) asks you to explain budget statements , specifically the "master budget, including statements of profit and loss, financial position and cash flow". Objective test questions typically give you a few budget figures and ask for one balance: cash received from customers, the closing receivables figure, budgeted profit, closing retained earnings or the closing cash balance. You need to understand how the statements connect, not memorise a format.
What the master budget contains
Functional budgets (Section 5.2) answer operational questions: how many units to sell and make, how much material to buy, how many labour hours are needed. The master budget translates those plans into the organisation's overall financial position:
Master budget statement Question it answers Main inputs
Budgeted statement of profit or loss Will the plan be profitable? Sales budget, cost of sales, overhead budgets, depreciation
Budgeted cash flow (cash budget, sometimes also a statement of cash flows) Will there be enough cash, and when? Receipts and payments timing, capital expenditure, financing, dividends
Budgeted statement of financial position What will the organisation own and owe at the end of the period? Opening balances plus the effects of the profit and cash budgets
The three statements are linked. Profit increases retained earnings; the difference between profit and cash is explained by non-cash items (such as depreciation) and changes in working capital (inventory, receivables and payables).
Worked example: Brook Ltd
Brook Ltd makes one product. Its variable production cost is $20 per unit (materials $12, labour and variable overhead $8). Fixed overheads are charged to profit in full.
Opening statement of financial position, 1 January
- Item $
- Non-current assets (cost $200,000, accumulated depreciation $50,000) 150,000
- Finished goods inventory (1,000 units × $20) 20,000
- Trade receivables 40,000
- Cash 25,000
- Total assets 235,000
- Trade payables (materials) 12,000
- Share capital 100,000
- Retained earnings 123,000
- Total equity and liabilities 235,000
- Budget for the year
Sales: 10,000 units at $50, all on credit. Closing receivables: $60,000.
Closing finished goods inventory: 1,500 units.
Materials are bought on credit and used immediately (no materials inventory). Closing payables: $18,000.
Labour and variable overhead are paid in the year incurred.
Fixed overheads: $150,000, including depreciation of $20,000. The rest is paid in cash.
A new machine costing $60,000 is bought for cash.
Dividends of $30,000 are paid. Ignore tax.
Step 1: production and cost of sales
Production = sales + closing inventory − opening inventory = 10,000 + 1,500 − 1,000 = 10,500 units .
- Cost of sales $
- Opening inventory (1,000 × $20) 20,000
- Production (10,500 × $20) 210,000
- Less closing inventory (1,500 × $20) (30,000)
- Cost of sales (10,000 × $20) 200,000
- Step 2: budgeted statement of profit or loss
- Budgeted statement of profit or loss $
- Sales (10,000 × $50) 500,000
- Cost of sales (200,000)
- Contribution 300,000
- Fixed overheads (including $20,000 depreciation) (150,000)
- Operating profit 150,000
Dividends of $30,000 are a distribution of profit, not an expense, so retained profit for the year is $120,000.
Step 3: receipts and payments
Use the "opening + incurred − closing" logic for each working capital balance: Cash from customers = 40,000 + 500,000 − 60,000 = 480,000 \text{Cash from customers} = 40{,}000 + 500{,}000 - 60{,}000 = 480{,}000 Cash from customers = 40 , 000 + 500 , 000 − 60 , 000 = 480 , 000
Materials purchased = 10,500 units × $12 = $126,000. Cash to suppliers = 12,000 + 126,000 − 18,000 = 120,000 \text{Cash to suppliers} = 12{,}000 + 126{,}000 - 18{,}000 = 120{,}000 Cash to suppliers = 12 , 000 + 126 , 000 − 18 , 000 = 120 , 000
Labour and variable overhead paid = 10,500 × $8 = $84,000. Cash fixed overheads = $150,000 − $20,000 depreciation = $130,000.
Step 4: budgeted cash flow
- Budgeted cash flow $
- Opening cash 25,000
- Receipts from customers 480,000
- Payments to suppliers (120,000)
- Labour and variable overhead (84,000)
- Cash fixed overheads (130,000)
- Purchase of machine (60,000)
- Dividends paid (30,000)
- Net cash flow for the year 56,000
- Closing cash 81,000
- Step 5: budgeted statement of financial position, 31 December
- Item $
- Non-current assets (cost $260,000, accumulated depreciation $70,000) 190,000
- Finished goods inventory (1,500 × $20) 30,000
- Trade receivables 60,000
- Cash 81,000
- Total assets 361,000
- Trade payables 18,000
- Share capital 100,000
- Retained earnings (123,000 + 150,000 − 30,000) 243,000
- Total equity and liabilities 361,000
The statement balances, which confirms that the profit and cash budgets are consistent.
Reconciling budgeted profit and budgeted cash
Brook's operating profit is $150,000, but its operating cash flow is only $146,000 ($480,000 received minus $334,000 of operating payments). The reconciliation, in the format of a statement of cash flows, explains why:
- Reconciliation $
- Operating profit 150,000
- Add back depreciation (non-cash) 20,000
- Increase in inventory (20,000 to 30,000) (10,000)
- Increase in receivables (40,000 to 60,000) (20,000)
- Increase in payables (12,000 to 18,000) 6,000
- Cash from operations 146,000
- Investing: purchase of machine (60,000)
- Financing: dividends paid (30,000)
- Net cash flow 56,000
Important
Increases in inventory and receivables tie up cash , so they are deducted. An increase in payables means suppliers are financing more of the business, so it is added . Depreciation is added back because it reduced profit without any cash leaving the business.
Why the master budget matters
Planning: it shows whether the functional plans add up to an acceptable profit and a sustainable cash position.
Financing: a budgeted cash shortfall (Section 5.4) signals the need for an overdraft or other finance well before it happens.
Control: the budgeted statements become benchmarks for actual results.
Communication and approval: the board approves the master budget as the organisation's plan for the period.
Tip
In exam questions, always check whether sales or purchases are on credit and whether there are opening and closing balances. The mistake most candidates make is treating the sales figure as the cash received.