You are on page 1of 1

8. a) What is Master Budget ? How it is different from cash budget?

The Master budget is the aggregation of all lower-level budgets produced by a
company’s various functional areas, and also includes budgeted financial statements, cash
forecast and a financing plan. The master budget is typically presented in either a monthly
or quarterly format, or usually covers a company’s entire fiscal year. It is the central
planning tool that a management team uses to direct the activities of a corporation, as well
as to judge the performance of its various responsibility centers. Many lower level budgets
have specific formats that are used to arrive at certain outcomes such as the number of
units of products to be manufactured. Master budget looks very much like a standard set of
financial statements.
Cash budget does not usually appear in the standard format of the statement of
cash flows. Instead it serves the more practical purpose of identifying specific cash inflows
and outflows that will result from the rest of the budget model. Master budget summarizes
the planned activities of all subunits of an organization whereas capital budget details the
planned expenditures long term investments.

b) What are the various methods of inventory valuation? Explain the effect of
inventory valuation on profit during inflation? What are the provisions of Accounting
standard 2(A S-2) with regards to inventory valuation?
Inventory valuation methods are used to calculate the cost of goods sold and cost
of ending inventory. There are 3 methods.
>> First-in-First-out (FIFO): - Items from the inventory are sold in the order in which
they purchased or produced.
>> Last-in-Last-out (LIFO): - The newer inventory is sold first and older remains in
inventory. When price of good increases, cost of goods is higher and ending inventory
balance is lower.
>> Average Cost (AVCO): - weighted average cost per unit is calculated for the entire
inventory on hand which is used to record cost of goods sold.
During the periods of inflation, the FIFO method gives more accurate value for
ending inventory on the balance sheet. FIFO increases the net income and increased income
can increase taxes owed. Using LIFO during periods of inflation tend to show and ending
inventory amount on the balance sheet that is much lower than what the inventory is truly
worth at current prices, this means lower net income due to a higher cost of goods sold.
With average cost method, the results tend to fall between LIFO and FIFO.