When actual warranty claims occur, how should a company adjust its estimated warranty liability, and what is the impact on cash flow?

• A. Increase the liability and increase cash flow as claims are settled.
• B. Reduce the liability and increase cash flow as claims are settled.
• C. Reduce the liability and decrease cash flow as cash is used to settle claims.
• D. Increase the liability and decrease cash flow as cash is used to settle claims.

Answer: (C)