How do increases in assets and liabilities respectively affect cash flow?

In the context of cash flow management, an increase in assets generally represents a use of cash because it indicates that cash has been spent to acquire those assets. For instance, purchasing new equipment or inventory requires cash outflows, thus reflecting a decrease in available cash.

Conversely, an increase in liabilities is typically viewed as a source of cash. When a company takes on more liabilities—such as through loans or credit—it is essentially receiving cash, which can be used for operational needs or investment purposes without an immediate outflow of cash. This borrowing increases the company’s cash position in the short term.

Therefore, in this situation, the correct understanding reflects that increased assets are a use of cash, while increased liabilities serve as a source of cash, illustrating the dynamic nature of cash flows in relation to a company's financial position.