A contractor has beginning cash of $75,000, receives $180,000 from customers, pays $145,000 for expenses, and purchases equipment for $25,000. What is the ending cash balance?
Correct Answer
A) $85,000
Ending cash = Beginning cash + Cash receipts - Cash payments = $75,000 + $180,000 - $145,000 - $25,000 = $85,000. This follows the basic cash flow calculation including all cash inflows and outflows.
Why This Is the Correct Answer
Option A is correct because it properly applies the cash flow formula by starting with beginning cash and accounting for all cash movements during the period. The calculation adds cash receipts from customers ($180,000) and subtracts all cash payments including both operating expenses ($145,000) and capital expenditures for equipment ($25,000). This systematic approach ensures all cash inflows and outflows are captured to determine the accurate ending cash position of $85,000.
Why the Other Options Are Wrong
Option B: $110,000
$110,000 is incorrect because it fails to account for the equipment purchase of $25,000. This answer would result from calculating $75,000 + $180,000 - $145,000 = $110,000, but ignoring the cash outflow for equipment acquisition.
Option C: $255,000
$255,000 is incorrect because it only adds beginning cash and receipts without subtracting any expenses or equipment purchases ($75,000 + $180,000 = $255,000). This completely ignores all cash outflows during the period.
Option D: $75,000
$75,000 is incorrect because it suggests no net change in cash position, which would only occur if total cash inflows exactly equaled total cash outflows. This ignores the actual cash movements that occurred during the period.
Memory Technique
Use 'BIRO': Beginning + Inflows - Outflows = Result. Remember that equipment purchases are cash outflows just like expense payments.
Reference Hint
Look up 'Cash Flow Statements' or 'Financial Management for Contractors' chapter in your contractor reference manual for cash flow calculation methods.
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