Name and describe the final step in preparing the operating budget.
What will be an ideal response?
ANSWER: The final step in the budget process is the preparation of pro forma statements, which are projections of a firm's financial position during a future period (pro forma income statement) or on a future date (pro forma balance sheet). In the normal accounting cycle, the income statement is prepared first, followed by the balance sheet. Similarly, in the preparation of pro forma statements, the pro forma income statement is followed by the pro forma balance sheet.
In the process of preparing the operating budget, the firm already will have prepared the pro forma income statements for each month in the budget period. Each month presents the anticipated income and expense for that particular period, which is what the monthly pro forma income statements do. To prepare an annual pro forma income statement, the firm combines all months of the year.
The process for preparing a pro forma balance sheet is more complex: The last balance sheet prepared before the budget period began, the operating budget, and the cash-flow budget are needed to prepare it. Starting with the beginning balance sheet balances, the projected changes as depicted on the budgets are added to create the projected balance sheet totals.
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