The operating budget is the budget for all the activities that get reported in the income statement, and it is presented in the same format as the income statement. The main difference is the income statement summarizes past events, while the budget forecasts future events. The cash budget is a list of forecast receipts and payments and their effect on cash balances. If the primary purpose of the budget is to support the planning process, the most imp. 1) previous year"s budget: unrealistic as it could be based on out of date data. 2-previous year"s budget + inflation adjustment: more realistic, 3% inflation rate won"t necessarily be relevant to all expense items. It"s hard to tell if the budget is adequate and it"s reckless to commit to a budget without full information. 3-previous year actual + inflation adjustment: expenses are under presented. It"s incorrect to base next year"s budget on the expenses incurred in a certain month like september.