A contractor's projected cash receipts for the next three months are $75,000, $85,000, and $95,000. Projected disbursements are $80,000, $78,000, and $88,000. Starting cash is $20,000. What is the ending cash balance after three months?
Correct Answer
D) $29,000
Month 1: $20,000 + $75,000 - $80,000 = $15,000. Month 2: $15,000 + $85,000 - $78,000 = $22,000. Month 3: $22,000 + $95,000 - $88,000 = $29,000.
Why This Is the Correct Answer
This is a sequential cash flow calculation where each month's ending balance becomes the next month's starting balance. The calculation follows the basic formula: Ending Cash = Starting Cash + Receipts - Disbursements for each month. By tracking the cash flow month by month, we can see how the contractor's cash position changes over the three-month period, ultimately ending at $29,000.
Why the Other Options Are Wrong
Option A: $27,000
$31,000 is incorrect and suggests an error in the sequential calculation, possibly from miscalculating one of the monthly ending balances or not properly carrying forward the correct starting balance to the next month.
Option B: $31,000
$27,000 is incorrect and indicates calculation errors in the cash flow analysis, likely from mistakes in addition or subtraction during the month-by-month tracking process.
Memory Technique
Remember 'SRD' - Starting cash + Receipts - Disbursements = ending cash for each period, and always carry the ending balance forward as the next period's starting balance
Reference Hint
Business and Finance chapter covering cash flow analysis and working capital management
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