What short-term financial issue is ABC experiencing?

• A. Abundant cash flow due to high sales
• B. Stable cash flow with minimal capex
• C. Positive net cash flow with some investments
• D. Negative net cash flow in the short term due to high capital expenditure

Answer: (D)

The idea being tested is how capital spending affects a company’s short-term cash flow. Short-term cash flow looks at cash in minus cash out for a period, and heavy spending on capital expenditures drives cash out from investing activities. If ABC is investing a lot in fixed assets, that sizable outflow can outweigh cash coming in from operations, leading to negative net cash flow in the short term. This is why the option describing negative net cash flow in the short term due to high capital expenditure is the best fit.

If cash flow were abundant, or if capex were minimal, you wouldn’t see a short-term cash issue. Even with some investments, if operating cash flow covers them and leaves a positive net result, there wouldn’t be a problem in the short run.