Final answer:
When purchasing machinery with cash, a company's balance sheet and statement of cash flows are affected. The balance sheet records a decrease in cash and an increase in assets, while the cash flow statement shows an outflow of cash under investing activities.
Step-by-step explanation:
When machinery is purchased with cash, two primary financial statements are affected: the balance sheet and the statement of cash flows. On the balance sheet, the asset side increases due to the addition of the new machinery under property, plant, and equipment (PP&E), while the cash and cash equivalents decrease by the same amount on the liabilities and equity side. Concurrently, the statement of cash flows reflects this transaction in the investing activities section as an outflow of cash, indicating the use of cash to purchase the machinery.
Firms need to raise financial capital to fund such capital investments, and they can do this by various means, such as engaging with early-stage investors, reinvesting profits, utilizing bank loans or issuing bonds, and selling stock. The selection of a financial capital source influences the firm's ownership structure and cost of capital, which are critical to its overall financial strategy and performance.