Capital Expenditure and Depreciation Essay Example | Topics and Well Written Essays - 1500 words

Capital Expenditure and Depreciation - Essay Example Acquiring fixed assets like building, land, plant and machinery, motor vehicle and furniture fittings are regarded as the capital expenditure. The assets are not to be sold for making profit but that assets should be retained in the business. Capex generally yields gains over a long period of time (Banerjee, 2010). Capex on a financial statement is important as the investors are interested in the amount of capital improvement that he experiences. The declining capex will make the investor cautious as well as abnormal increased values signals that the investor should also be cautious (Jennings, 2006). The different types of capex are the following: Expenditure resulting from the acquisition of permanent assets: Any asset that can be converted into cash later. The money spent to acquire the asset is called capex (Warren, 2009). Expenditure resulting from purchase, erection or receipt of a fixed asset: The expenses in addition to the purchase price that are incurred for manufacturing th e asset for use are added to the cost of the asset and thus is regarded as capex. The examples are the wages that are paid to the workers for manufacturing machines, the cost of the place where the machine will be manufactured and the interest on the loan raised to purchase a fixed asset. Expenditure resulting from improvement of the fixed asset: If the profit earning capacity increases because of the expenditure, through lowering of cost or increase the output level, it is capital expenditure. Expenditure incurred to get the right to carry on business: The expenses that are needed for establishing a business or acquiring license is capital expenditure. The cost of patent is also capital expenditure. Expenditure resulting from acquisition of tangible asset: The expenditure incurred on a non profitable asset is treated as capital expenditure. Factors that add to the cost of capital expenditure (with examples) Cost of capital expenditure i.e., the interest payments and the cash-flow, that affect cash that are available in the capital goods. Example: If one borrows ? 10000 to buy a new coffee maker and it brings with it an additional ?1000 / month of profit but the monthly interest that are to be paid for the loan is ?1120, then it is said to be the bad expenditure with a negative impact on the business. Now if the same person borrows the same amount but bring ?1500 profit/month it is a good investment. Thus, there are different factors that add up to the cost of capital expenditure and can make an investment unprofitable and even profitable. How does capital expenditure lose value over time? A product when capitalized the value of the item is placed in an asset that increases the total value of the company. The reason behind these is that the items are considered to lose their value slowly or increase over time. The asset is listed on the company’s property tax inventory and the asset is provided a number for tracking purposes (Elmaleh, 2005). The company gets bill for taxes on the value of the assets and the listing of an asset that is depreciating decreases in value each year until it is considered to have no value (Hoofman, 2009). After capitalizing, the item is allowed to depreciate over a period of time, such as 3 – 5 years of time. After depreciation the entire cost of the item is not revealed in the expenses at one time,