Capital Expenditures

Examples of Capital Expenditures in the following topics:

• Valuing Repairs, Maintenance, and Additions

  • Improvements to existing plant assets are capital expenditures because they increase the quality of services obtained from the asset.
  • Betterments or improvements to existing plant assets are capital expenditures because they increase the quality of services obtained from the asset.
  • Since these expenditures benefit an increased number of future periods, accountants capitalize rather than expense them.
  • If an expenditure that should be expensed is capitalized, the effects are more significant.
  • Explain what a capital expenditure is and how a company would account for it.

• Operating Expenses, Non-Operating Expenses, and Net Income

  • Its counterpart, a capital expenditure, or non operating expense, is the cost of developing or providing non-consumable parts for the product or system.
  • For example, the purchase of a photocopier is a capital expenditure.

• Reporting R&D Cost

  • Expense R&D, unless items have alternative future uses, then allocate as consumed, or capitalize and depreciate as used.
  • A cost which cannot be deducted in the year in which it is paid or incurred must be capitalized.
  • The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized.
  • The capital expenditure costs are then amortized or depreciated over the life of the asset.
  • The costs associated with R&D activities and the accounting treatment accorded them are as follows: expense the entire costs, unless the items have alternative future uses (in other R&D projects or otherwise), then carry as inventory and allocate as consumed, or capitalize and depreciate as used.

• Types of Long-Lived Assets

  • Capital expenditures are incurred to get the asset "up and running".

• Overview of Lease Accounting

  • A lease allows a company to get a major piece of equipment with no large expenditure of cash.
  • There are two types of leases capital leases and operating leases.
  • Capital equipment is financed either with debt or equity.
  • To that end, a capital lease must be recorded as liability on the company's balance sheet, it is important to note that the IRS treats capital leases as a liability.
  • An equipment lease allows a company to get a piece of equipment without a large expenditure.

• Uses of Financial Reports

  • Financial institutions (banks and other lending companies) use them to decide whether to grant a company working capital or extend debt securities (such as long-term bank loans or debentures) to finance expansion and other significant expenditures.

• Reporting Intangibles

  • Cost includes all costs of acquisition and expenditures necessary to make the intangible asset ready for its intended use—for example, purchase price, legal fees, and other incidental expenses.
  • The costs of acquiring and defending a copyright may be capitalized, but the research and development costs involved must be expensed as incurred.

• Expense Recognition

  • An important issue in accounting is when to recognize expenditures.
  • When a business recognizes an expenditure, it records the amount in its financial records.
  • The expenditure offsets the income the business earned and is used to calculate the business's profit.
  • If the business uses cash basis accounting, an expenditure is recognized when the business pays for a good or service.

• Characteristics of Bonds

  • Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure .
  • The market price of a tradeable bond will be influenced among other things by the amounts, currency, the timing of the interest payments and capital repayment due, the quality of the bond, and the available redemption yield of other comparable bonds which can be traded in the markets.

• Additional Factors to Consider

  • For example, a family which has $20,000 available may choose to spend it on many different items, which can all be seen as competing with each other for the family's expenditure.
  • Finally, the valuator needs to consider the discount or capitalization rate of the company, specify what percentage of the company is being valued, and take into account any marketability or minority interest discounts.