Final answer:
Paying off the principal balance of a note payable directly affects the balance sheet by reducing liabilities and also impacts the statement of cash flows due to the outflow of cash. option c.
Step-by-step explanation:
Paying off the principal balance of a note payable affects the balance sheet. When a company decides to access financial capital, it may borrow from a bank, issue bonds, or issue stock. Borrowing money through loans or bonds comes with the obligation of scheduled interest payments. Moreover, a company's balance sheet is a financial statement that lists its assets and liabilities, and when the principal on a debt is repaid, the liability decreases, causing a change in the balance sheet. However, the repayment of the debt principal also leads to a decrease in the company's cash or cash equivalents, which is shown in the statement of cash flows. Issuing stock, on the other hand, can alter the company's statement of stockholders' equity but does not affect the other financial statements in the same direct way as debt repayment.