Question

A company experienced an event that caused total assets and liabilities to decrease and caused a cash outflow to appear on the statement of cash flows. This could have been due to ______.

1) Recognizing accrued interest revenue
2) Paying off the principal balance of a loan
3) Recognizing accrued interest expense
4) Paying off an accrued interest payable

Answer 1

A decrease in total assets and liabilities on a company's balance sheet accompanied by a cash outflow is likely due to paying off the principal balance of a loan or an accrued interest payable.

Step-by-step explanation:

The company experienced an event causing total assets and liabilities to decrease and a cash outflow on the statement of cash flows likely due to paying off the principal balance of a loan or paying off an accrued interest payable. Option 2 and 4 could both result in such a financial statement impact. When the principal of a loan is paid off, the asset (cash) decreases as the cash is used to clear the liability (loan principal). Similarly, when an accrued interest payable is settled, the cash asset decreases as the interest liability is cleared. Neither recognizing accrued interest revenue nor recognizing accrued interest expense would cause cash to decrease, so options 1 and 3 are not correct in this scenario.