What has temporarily weakened ABC's liquidity position?

• A. Recent capital expenditure on solar panels and plastic-shredding machinery.
• B. A major equity issue to raise funds.
• C. A sudden drop in demand for cement.
• D. Excess cash reserves with low returns.

Answer: (A)

Capital expenditure on assets like solar panels and plastic-shredding machinery drains the company’s readily available cash and reduces current assets. Liquidity is the ability to meet short-term obligations with cash or assets that can be quickly turned into cash. When cash is spent on long-term assets, the immediate pool of liquid resources shrinks, so ABC’s ability to cover near-term liabilities is temporarily weaker until the new assets are in place and either start generating cash or financing is arranged.

An equity issue would bring in cash and strengthen liquidity right away. A sudden drop in demand for cement affects cash flow through sales, but it isn’t the direct short-term cash drain of investing in assets. Excess cash reserves represent unused liquidity, not a weakness.