A contractor's cash flow projection shows the following for next month: Beginning cash $25,000, Expected receipts $180,000, Fixed costs $45,000, Variable costs $95,000, Equipment payment $15,000. What is the projected ending cash balance?
Correct Answer
A) $50,000
Ending cash = Beginning cash + Receipts - Total expenses. $25,000 + $180,000 - ($45,000 + $95,000 + $15,000) = $25,000 + $180,000 - $155,000 = $50,000.
Why This Is the Correct Answer
The correct answer uses the fundamental cash flow formula: Ending Cash = Beginning Cash + Cash Receipts - Total Cash Outflows. All expenses (fixed costs, variable costs, and equipment payments) are cash outflows that must be subtracted from available cash. The calculation properly accounts for all cash movements: $25,000 starting cash plus $180,000 in receipts minus $155,000 in total expenses equals $50,000 ending cash balance.
Why the Other Options Are Wrong
Option B: $205,000
This answer of $130,000 appears to result from only subtracting fixed costs ($45,000) and ignoring variable costs and equipment payments. The incorrect calculation would be $25,000 + $180,000 - $45,000 = $160,000, or possibly another partial expense calculation error.
Option C: $65,000
This answer of $205,000 represents the total of beginning cash plus receipts ($25,000 + $180,000) without subtracting any expenses. This ignores the fundamental principle that all cash outflows must be deducted to determine the actual ending cash position.
Option D: $130,000
This answer of $65,000 likely results from incorrectly excluding one expense category, such as forgetting to subtract the $15,000 equipment payment. The calculation would be $25,000 + $180,000 - $140,000 = $65,000, but this omits a legitimate cash outflow.
Memory Technique
Remember 'BRITE': Beginning cash + Receipts - Total expenses = Ending cash. Always account for ALL money going out (fixed, variable, and equipment costs).
Reference Hint
Business and Finance chapter, specifically cash flow management and working capital sections
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