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CS Executive · Corporate Accounting and Financial Management · Forecasting Financial Statements

Which statement correctly distinguishes a forecast from a budget in corporate financial planning?

A forecast predicts what is likely to happen based on trends and assumptions, while a budget is a management plan stating what the firm intends to achieve, used as a target and control tool. The period covered does not distinguish them, and neither is a legal commitment.

  1. AA forecast is a prediction of what is likely to happen, while a budget is a plan of what management wants to achieve and sets targetsCorrect
  2. BA forecast is always prepared for a longer period than a budget
  3. CA forecast is a legally binding commitment, whereas a budget is only an estimate
  4. DA forecast is prepared only after the year ends, whereas a budget is prepared before

Explanation

A forecast projects expected outcomes based on assumptions and trends, whereas a budget is a target-setting and control document reflecting management's intended plan. The period covered can vary for both, and neither is legally binding. Forecasts are made before the period ends, so the last option is wrong.

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