Accounting Fundamentals Certification (AFC) Practice Test

How is cash balance at the end of the month calculated?

1. Total cash received minus cash spent

2. Cash on hand plus total cash received

3. Cash on hand minus total cash expenses

4. Beginning cash plus expenses

The correct answer is: Cash on hand plus total cash received

The calculation of the cash balance at the end of the month is determined by taking the cash on hand at the start of the month and adding the total cash received during that period. This reflects all incoming funds, which increases the total cash available for the business. It's essential to understand that cash on hand represents the starting point for the month, while total cash received includes all sources of income, such as revenue from sales, payments received from customers, and any other cash inflows. By adding these amounts together, you are accounting for all available cash at the end of the month, which provides a comprehensive view of the company’s liquidity. This ending cash balance serves as a critical measure for assessing financial health and planning for obligations in the upcoming month. The other responses don't encompass the correct components needed for accurately calculating the end-of-month cash balance. For example, simply subtracting expenses or looking at beginning cash doesn't give a complete picture and may overlook important incoming cash flows.