A construction company projects the following cash flows for the next quarter: Month 1: -$50,000, Month 2: +$75,000, Month 3: -$25,000. Starting with a cash balance of $40,000, what will be the ending cash balance?
Correct Answer
B) $40,000
Starting balance $40,000 + (-$50,000) + $75,000 + (-$25,000) = $40,000. The net cash flow for the quarter is $0.
Why This Is the Correct Answer
The correct answer is A ($40,000) because cash flow projections are calculated by adding all monthly cash flows to the starting balance. Starting with $40,000, we add the algebraic sum of all three months: -$50,000 + $75,000 + (-$25,000) = $0 net change. Therefore, the ending balance equals the starting balance of $40,000.
Why the Other Options Are Wrong
Option A: $50,000
Option D ($50,000) is incorrect because it adds $10,000 to the starting balance, suggesting a net positive cash flow of $10,000, which doesn't match the actual calculation.
Option C: $45,000
Option C ($45,000) is incorrect because it adds $5,000 to the starting balance, but the net cash flow for the quarter is actually zero, not positive $5,000.
Option D: $35,000
Option B ($35,000) is incorrect because it appears to subtract $5,000 from the starting balance, which doesn't match the actual net cash flow calculation of zero.
Memory Technique
Remember 'SAME': Starting Amount + Monthly Effects = Ending balance. Negative flows subtract, positive flows add.
Reference Hint
Business and Finance for Contractors - Chapter on Cash Flow Management and Financial Planning
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