A construction company projects the following cash flows for the next quarter: Month 1: -$25,000, Month 2: +$15,000, Month 3: +$35,000. Starting with a cash balance of $40,000, what is the projected ending cash balance?
Correct Answer
C) $65,000
Starting balance $40,000 + Month 1 (-$25,000) + Month 2 (+$15,000) + Month 3 (+$35,000) = $65,000. The net cash flow for the quarter is +$25,000.
Why This Is the Correct Answer
Option C is correct because cash flow projections require adding all inflows and outflows to the starting balance in chronological order. Starting with $40,000, we subtract the Month 1 outflow of $25,000, then add the Month 2 inflow of $15,000, and finally add the Month 3 inflow of $35,000. This sequential calculation gives us the ending balance of $65,000.
Why the Other Options Are Wrong
Option A: $25,000
Option A ($25,000) represents only the net cash flow for the quarter ($35,000 + $15,000 - $25,000 = $25,000) but fails to include the starting cash balance of $40,000.
Option B: $40,000
Option B ($40,000) incorrectly suggests that the ending balance equals the starting balance, which would only be true if the net cash flow for the quarter was zero, but the actual net flow is +$25,000.
Option D: $115,000
Option D ($115,000) incorrectly adds all positive numbers ($40,000 + $15,000 + $35,000 + $25,000) without properly subtracting the Month 1 negative cash flow of $25,000.
Memory Technique
Remember 'SANE' - Starting balance, Add inflows, Negate (subtract) outflows, Equals ending balance. Always track the running total month by month like a checkbook register.
Reference Hint
Business and Finance for Contractors - Chapter on Cash Flow Management and Financial Planning, or Construction Accounting and Financial Management sections
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