Entrepreneurship and Small Business (ESB) V2 Certification Practice Exam

What is the formula for calculating ending cash balance?

1. Total cash - total costs

2. Total revenue - total costs

3. Total assets - total liabilities

4. Total income - total expenses

The correct answer is: Total cash - total costs

The correct choice for calculating the ending cash balance is based on the understanding of cash flow management within a business. The formula that is commonly used is the total cash available at the beginning of the period, plus any cash inflows, minus cash outflows during that same period. When considering the choice of total cash minus total costs, it highlights the concept that the ending cash balance is derived from what you initially have (total cash) after accounting for the expenses that have been incurred (total costs). Understanding this formula is crucial as it allows business owners and managers to have visibility into their cash position and ensures that they maintain sufficient liquidity to meet their financial obligations. Other choices focus on different financial metrics: total revenue minus total costs emphasizes profit rather than cash management, total assets minus total liabilities relates to net worth rather than cash flow, and total income minus total expenses accounts for profitability in broader terms without directly reflecting cash available. Thus, total cash minus total costs directly addresses the concern of available cash, making it the most appropriate representation for ending cash balance.