Question

An outflow of cash would result from which of the following?

1) The decrease in an asset account other than cash.
2) The increase in an equity account.
3) The decrease in a liability account.
4) The increase in a liability account.

Answer 1

An outflow of cash occurs when there is a decrease in a liability account, which is when a company pays off its debts or obligations, leading to a reduction in the cash account.

Step-by-step explanation:

An outflow of cash would result from the decrease in a liability account. In accounting, a decrease in liabilities, such as when a company pays off debt, would result in a corresponding decrease in the cash account, because cash is used to settle the liability. The various options provided in the question can be interpreted as follows:

• The decrease in an asset account other than cash does not directly result in a cash outflow.
• The increase in an equity account does not directly entail cash movement; it might be from retained earnings or additional invested capital.
• The decrease in a liability account, such as paying off accounts payable or loans, would result in a cash outflow as obligations are settled.
• The increase in a liability account, like when taking on a new loan, would typically result in a cash inflow as funds are received.

The balance in the cash account is affected by these transactions differently, with only the decrease in liabilities resulting in an immediate cash outflow.