What is the impact of purchasing equipment on financial statements?

When equipment is purchased, the financial transaction affects both the cash account and the fixed assets on the balance sheet. The correct answer indicates that cash decreases because the company is spending cash to acquire the equipment. This outflow is a use of cash, thus reducing the cash balance reported in the financial statements.

Simultaneously, fixed assets increase as the equipment purchased is recognized as a long-term asset on the balance sheet. This is essential since fixed assets represent the company's investments in physical items that are vital for conducting business operations. The increase in fixed assets signifies the addition of resources that can contribute to generating revenue over time.

Overall, this accounting treatment reflects a common transaction in asset acquisition, demonstrating the relationship between cash flow and asset values on the financial statements.