what is capital expenditure with example

Examples include expenditures incurred in relocating the business and money paid for goodwill (e.g., the right to use the established name of an outgoing firm). “Capital expenditures,” or capital outlay, means expenditures for the acquisition cost for equipment, for example, means the net invoice price of the. The purchase of existing business. Purchase of capital goods from other suppliers, e.g. machines, computers, lighting systems. For tax purposes, capital.

: What is capital expenditure with example

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What is capital expenditure with example
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What Are Capital Expenditures and How Do I Estimate Them Correctly? [#AskBP 080]

Capital expenditure

"Capex" redirects here. For other uses, see Capex (disambiguation).

Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land.[1][2] It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an existing asset, such as repairing the roof.[3]

Capital expenditures contrast with operating expenses (opex), which are ongoing expenses that are inherent to the operation of the asset. Opex includes items like electricity or cleaning. The difference between opex and capex may not be immediately obvious for some expenses; for instance, repaving the parking lot may be thought of inherent to the operation of a shopping mall. The dividing line for items like these is that the expense is considered capex if the financial benefit of the expenditure extends beyond the current fiscal year.[4]

Usage[edit]

Capital expenditures are the funds used to acquire or upgrade a company's fixed assets, such as expenditures towards property, plant, or equipment (PP&E).[3] In the case when a capital expenditure constitutes a major financial decision for a company, the expenditure must be formalized at an annual shareholders meeting or a special meeting of the Board of Directors.[citation needed] In accounting, a capital expenditure is added to an asset account, thus increasing the asset's basis (the cost or value of an asset adjusted for tax purposes). Capex is commonly found on the cash flow statement under "Investment in Plant, Property, and Equipment" or something similar in the Investing subsection.[citation needed]

Accounting rules[edit]

For tax purposes, capex is a cost that cannot be deducted in the year in which it is paid or incurred and 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.[citation needed] The capital expenditure costs are then amortized or depreciated over the life of the asset in question. Further to the above, capex creates or adds basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US, Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and exceptions.[5]

Included in capital expenditures are amounts spent on:

  1. acquiring fixed, and in some cases, intangible assets
  2. repairing an existing asset so as to improve its useful life
  3. upgrading an existing asset if it results in a superior fixture
  4. preparing an asset to be used in business
  5. restoring property or adapting it to a new or different use
  6. starting or acquiring a new business

An ongoing question for the accounting of any company is whether certain costs incurred should be capitalized or expensed. Costs which are expensed in a particular month simply appear on the financial statement as a cost incurred that month. Costs that are capitalized, however, are amortized or depreciated over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business costs are either expensable or capitalizable, but some costs could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset. Sometimes an organization needs to apply for a line of credit to build another asset, it can capitalize the related interest cost. Accounting Rules spreads out a couple of stipulations for capitalizing interest cost. Organizations can possibly capitalize the interest given that they are building the asset themselves; they can't capitalize interest on an advance to buy the asset or pay another person to develop it. Organizations can just perceive interest cost as they acquire costs to develop the asset.

The counterpart of capital expenditure is operating expense or operational cost (opex).

See also[edit]

References[edit]

Источник: https://en.wikipedia.org/wiki/Capital_expenditure

CapEx stands for capital expenditures, which is money used by an organization to purchase, improve, or sustain physical assets.

Commonly held physical assets include PP&E (property, plans, buildings, and equipment for running and sustaining the business).

In order to explain CapEx further I want to use a fictitious business to illustrate examples in a clear and concise way.

What is CapEx?

Firstly, imagine a company that makes jewelry - like engagement rings. In order to produce rings, the company needs basic materials (gold, diamonds, etc), equipment to turn these raw ingredients into final products, and labor.

Now imagine you own and operate this business.

As the owner of this company you decide that you will buy property (perhaps a warehouse for storing raw materials), equipment (such as a high temperature furnace to smelt gold), or fans to keep the showroom cool and comfortable.

What would you call this property and equipment? How would you account for them? To put it simply, this equipment is a capital expenditure.

Why?

In this case you are quite literally expending capital (money) in exchange for other types of assets to help the business grow.

And that is precisely what CapEx is.

Because buying the machinery, equipment, and property would help the business maintain or increase its operation, we classify these transactions as CapEx.

Another example is Goldspot Pens, a fountain pen store that sells bottled ink and fountain pens, who are investing in new, bigger warehouses for storing their fountain pens and ink. This costs more money, but increases Goldspot Pens' scope of economic performance in the future.

In this simple example, the choice to buy these future economically productive assets represents CapEx.

In summary, CapEx is the money an organization spends to buy, maintain, or improve its assets to increase its scope and economic performance.

How to Calculate CapEx

Now that you know what CapEx is, and are armed with an example of CapEx at a jewelry business, you might be curious how a company calculates CapEx in practice.

There is a simple equation: CapEx is equal to changes in PP&E added to Current Depreciation.

The formula: CapEx = ΔPP&E + Current Depreciation

Let’s break down these parts of the equation to clarify.

  1. CapEx: spending on business critical property or equipment or technology to grow the firm.
  2. ΔPP&E: changes in PP&E recorded on the balance vrbo customer service representative. If a firm buys a machine for $1M, for example, it will mark this machine in the PP&E section (usually under long term assets).
  3. Current Depreciation: a concept that captures the cost of the asset by the useful life of the asset.

Specifically, here are the steps what is capital expenditure with example calculate Current Depreciation.

  • Declare the useful life of the asset (10 years is a fair value to use).
  • Subtract the salvage value of the asset (that is, at the end of year 10 the machine will be worth some value).
  • Divide this value by the starting cost of the asset ($1,000,000)

In this example, let me show you what a depreciation table will yield. The asset starts at $1,000,000 on Day 1 but ends the depreciation cycle at $25,000.

YearBeginning Book ValueDepreciation PercentDepreciation AmountAccumulated Depreciation AmountEnding Book Value
1.$1,000,00010.00%$97,500$97,500$902,500
2.$902,50010.00%$97,500$195,000$805,000
3.$805,00010.00%$97,500$292,500$707,500
4.$707,50010.00%$97,500$390,000$610,000
5.$610,00010.00%$97,500$487,500$512,500
6.$512,50010.00%$97,500$585,000$415,000
7.$415,00010.00%$97,500$682,500$317,500
8.$317,50010.00%$97,500$780,000$220,000
9.$220,00010.00%$97,500$877,500$122,500
10.$122,50010.00%$97,500$975,000$25,000

Now that you know how to calculate depreciation, what is capital expenditure with example can solve CapEx mathematically, using either a Direct or Indirect Method.

Direct method:

  • Amount spent on asset #1
  • Plus: Amount spent on asset #2
  • Plus: Amount spent on asset #3
  • Less: Value received for assets that were sold
  • = Net CapEx

Indirect Method:

  • PP&E Balance in the current period
  • Less: PP&E balance in the previous period
  • Plus: Depreciation in the current period
  • = Net CapEx

If you bought an asset for $1,000,000 and sold it at the end what is capital expenditure with example year 10 for $25,000 your Capital Expenditure would be: $1,000,000 - $25,000 = $975,000.

The Meaning of CapEx in Practice

When you decide to buy equipment today, you are doing so because you believe that the equipment will generate future economic benefits, or profits.

If you didn’t believe this, you likely would not have purchased the property, hardware, or equipment in the first place. Because CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, you will need to justify how the purchase adds economic value to the firm's future.

For this reason, CapEx is considered a capitalized expenditure and not an expense.

This enables you, as the business owner, to match the economic benefits of the items you are buying with the costs in a given period of time.

If you were unable to match the purchase with economic benefits, you would treat the expenditure as an expense and not as an investment.

Summary

Many businesses, but not all, have CapEx.

Think about large companies like Google, AT&T, and Apple with large data centers, 5G networks, and fulfillment centers, respectively. These are all examples of CapEx.

These companies invest in these pieces of land, equipment, and machinery because each firm wants to secure a profitable future.

And without this CapEx, such a future would be harder to obtain.



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Capital Expenditure

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What Are the Types of Capital Expenditures (CapEx)?

A capital expenditure (CapEx) is the money companies use to purchase, upgrade, or extend the life of an asset. Capital expenditures are designed to be used to invest in the long-term financial health of the company. Capital expenditures are long-term investments, meaning the what is capital expenditure with example purchased have a useful life of one year or more.

Key Takeaways

  • A capital expenditure (CapEx) is the money companies use to purchase, upgrade, or extend the life of an asset.
  • Capital expenditures are long-term investments, meaning the assets purchased have a useful life of one year or more.
  • Types of capital expenditures can include purchases of property, equipment, land, computers, furniture, and software.

Understanding Capital Expenditures (CapEx)

Although the expenditures are beneficial to a company, they often require a significant outlay of money. As a result, companies must budget properly to effectively generate the revenue needed to cover the cost of the capital expenditure.

Capital expenditures are often employed to improve operational efficiency, increase revenue in the long term, or make improvements to the existing assets of a company. Capital spending is different from other types of spending that focus on short-term operating expenses, such as overhead expenses or payments to suppliers and creditors. 

Investors and analysts monitor a company's capital expenditures very closely because it can indicate whether the executive management is investing in the long-term health of the company.

CapEx and Depreciation

Depreciation is used to expense the fixed asset over its useful life. Depreciation helps to spread out the cost of an asset over many years instead of expensing the total cost in the year it was purchased. Depreciation allows companies to earn revenue from the asset while expensing a portion of its cost each year until the asset's useful life has ended.

For example, if an asset costs $10,000 and is expected to be in use for five years, $2,000 may be charged to depreciation in each year over the next five years. There are several methods used to calculate depreciation. The full value of costs that are not capital expenditures must be deducted in the year they are incurred.

Capital Expenditures Limits

There are capitalization limits, which specify that the price of assets must be greater than to be depreciated over time rather than charged entirely as an expense in the current year. The cost of record-keeping associated with depreciation causes capitalization limits to be put into effect. Costs that are not depreciated and are associated strictly with operational matters are known as operational expenditures.

Types of Capital Expenditures (CapEx)

Below are some of the common types of capital expenditures, which can vary depending on the industry.

Buildings and Property

A purchase or upgrade to a building or property would be considered a capital purchase since the asset has a useful purpose for many years. Purchases of property, plant, and equipment are often facilitated using secured debt or a mortgage, for which the payments are made over many years.

Interest expenses associated with debt financing may be depreciated as well as the cost of the asset. However, costs incurred with an issue of stock would not qualify for depreciation.

Upgrades to Equipment

In the manufacturing industry and other industries, machinery used to produce goods may become obsolete or simply wear out. Upgrades to the equipment are often are needed. If these upgrades are higher than the capitalization limit that is in place, the costs should be depreciated over time. Similar to buildings or property, equipment upgrades are often financed. The cost of this financing may be depreciated as well.

Software Upgrades

Software expenditures are a significant cost for large companies. Costs to upgrade or purchase software are considered CapEx spending and can be depreciated.

Computer Equipment

Technology and computer equipment, including servers, laptops, desktop computers, and peripherals would be capital expenditures.

Vehicles

Companies often need a fleet of vehicles for distribution or to carry out services for customers, such as delivery companies. These vehicles are considered capital expenditures. However, the costs associated with leasing vehicles are treated as operational expenses.

Intangible Assets

Assets for capital expenditures don't all need to be physical assets or tangible, but instead, can be intangible assets. If a company purchased a patent or a license, it could be considered a capital expenditure.

Special Considerations

Capital expenditures usually involve a significant outlay of money or capital, which often requires the use of debt. Given the expensive nature of capital expenditures, investors closely monitor how much debt is being taken on by a company to ensure the money is being spent wisely.

Long-term debt includes debt-servicing costs, such as interest expenses. Companies must generate enough revenue to be able to service the debt payments as well as the interest payments.

Although capital expenditures are an indicator for demonstrating the level of investment in a company by its management, too much debt can put the company into financial trouble.

Also, capital expenditures that are poorly planned or executed can also lead to financial problems in the future. For example, if a company's management team buys new technology that quickly becomes obsolete, the company would be stuck with the debt payments for many years without much revenue generated from the asset.

Some industries are more capital-intensive than others, such as the oil and gas industry where companies need to buy drilling equipment. As a result, it's important for investors to compare the capital expenditures of one company with other companies within the same industry.

Real-World Example of Capital Expenditures

The cash outflows from capital expenditures are listed on a company's cash flow statement under the investing activities section. The cash flow statement shows a company's inflows and outflows of cash in a period.

Capital expenditures are an outflow of cash listed within investing activities. However, if a company what is capital expenditure with example money for capital expenditures, it would be listed as an inflow of cash in the financing activities section and an outflow of cash in the investing activities section.

Below is an example of the cash flow statement for Tesla Inc. for years ending 2017, 2018, 2019, from the company's quarterly financial results.

Capital expenditures are shown as (negative numbers) under investing activities.

  • Tesla listed purchases of property and equipment (highlighted in blue) for $1.3 billion in 2019, $2.1 billion in 2018, and $3.4 billion in 2017.
  • The company also listed as capital expenditures the purchase of solar energy systems (highlighted in blue) for $105 million in 2019, $218 million in 2018, and $666 million in 2017.
Источник: https://www.investopedia.com/ask/answers/112814/what-are-some-examples-main-types-capital-expenditures-capex.asp

A Beginners Guide to Capex vs Opex

At some point, most businesses will come across the terms Capex and Opex.

Related to your business expenses, both refer to the money being paid out of your company - but in completely different ways. Is it time to lift the fog once and for all? Here's a beginner's guide to Capex vs Opex, explaining what they are, the benefits and disadvantages of both, and how these concepts can help you choose a Cloud computing model. Are you ready? 

What is Capex?

Capex stands for capital expenditure, and it refers to the expenses your business incurs in order to create benefits in the future.

As an example, if you invest in a new building or a new type of machinery, then this would be considered Capex. Why? The answer is that your business incur these expenses now in what is capital expenditure with example to generate profit in the future, in other words - while they might not positively impact your income right now, they are still a necessity for future production and income. In addition to covering expenses like a new warehouse or production site, Capex can also include the improvements and additions to existing assets. 

So, what is the significance of Capex in your business budgets? Well, in short we can say that it reflect how much a business is spending to invest in their future. Business analysts are often interested in the capital expenditure budgets of major companies for this very reason. Naturally, Capex can vary considerably from year to year, meaning that capital expenditures ought to be considered over a period of time. 

The appropriate capital expenditure depends on the industry. Some industries such as oil and gas necessitate a lot of capital investment, whilst others such as retail do not need nearly as much. Capex is also easier to understand when compared to the capital expenditure of rival organisations.

What is Opex?

Opex is short for ‘operational expenditure’ and refers to expenses a business incurs in its day to day operations. Operational expenditures such as wages, utilities and rent tend not to have future benefits. Rather, they are a necessity for right now. General repairs and maintenance of buildings are also considered an operating expense, supposing improvements and additions aren’t being made which impact the efficiency or longevity of the asset.

Opex is important to consider as it accurately reflect the costs of doing business, since no future benefits are gained. If the Opex is too high, a company can easily lose money. Unlike Capex, the debt of which can be offset by future benefits, suffering debt to pay for Opex is always a problem.

Like Capex, the appropriate Opex depends on the industry, and is more readily understood when looking at the figures of other businesses.

Accounting for Capex and Opex

A major difference between these two types of expenses is the way they are accounted for on your income statement.

As Capex acquires assets that have a useful life beyond the tax year, these expenses can’t be fully deducted in the year they’re incurred. Instead, they’re capitalised and either amortised or depreciated over the life of the asset. Intangible assets such as intellectually property are amortised, and tangible assets such as equipment are depreciated over their lifespan.

However, operating expenditure can be fully deducted. This means that Opex can be subtracted from the revenue when calculating the profit/loss of the organisation. Most companies are taxed on the profit they make, so any expenses you deduct influences your tax bill.

Capex vs Opex

In terms of income tax, organisations usually prefer Opex to Capex. For this reason, businesses will lease hardware from a vendor instead of buying it outright. Buying equipment is Capex, so not all of the money paid upfront can be deducted. The amount paid to a vendor for leasing is Opex as it is incurred as part of the daily business operations. Therefore, the organisation can deduct the cash that it spent that year.

Deducting expenses reduces income tax, which is levied on net income. It is also beneficial when considering the what is capital expenditure with example value of money – money available at the present time is worth more than in the future due to its earning capacity.

However, if a company wants to boost its earnings and book value, it may decide to make a capital expense and only deduct a small portion of it as an expense. This will lead to a higher value of assets on its balance sheet, as well as a higher net income that it can report to investors.

Capex, Opex and the Cloud

There are three popular types of Cloud computing: private, public, and hybrid. Understanding Capex and Opex is instrumental in recognising the differences between the different types of Clouds.

With the public Cloud, the service provider is the one making the Capex, so that their users can buy in an Opex or pay as you go model.

A private Cloud involves an organisation’s IT team doing the Capex, so that users or business units within a company will be able to consume the resources in an Opex or pay as you go model.

Businesses can use resources from both private and public Clouds, which becomes a hybrid Cloud. A hybrid Cloud can be managed by a single solution. If the buyer of the public Cloud is your IT team, then the hybrid Cloud essentially becomes a combination of Capex and Opex models. This gives businesses better flexibility to control their costs.

Cloud Services are fast becoming the norm for any modern business. However, there are so many solutions available that spending time finding the right system for you can cost your business a significant amount of time and money, and runs the risk of you implementing a solution that isn’t ideal.


Источник: https://www.softwareadvisoryservice.com/en/whitepapers/a-beginners-guide-to-capex-vs-opex/
what is capital expenditure with example

What is capital expenditure with example -

What Are the Types of Capital Expenditures (CapEx)?

A capital expenditure (CapEx) is the money companies use to purchase, upgrade, or extend the life of an asset. Capital expenditures are designed to be used to invest in the long-term financial health of the company. Capital expenditures are long-term investments, meaning the assets purchased have a useful life of one year or more.

Key Takeaways

  • A capital expenditure (CapEx) is the money companies use to purchase, upgrade, or extend the life of an asset.
  • Capital expenditures are long-term investments, meaning the assets purchased have a useful life of one year or more.
  • Types of capital expenditures can include purchases of property, equipment, land, computers, furniture, and software.

Understanding Capital Expenditures (CapEx)

Although the expenditures are beneficial to a company, they often require a significant outlay of money. As a result, companies must budget properly to effectively generate the revenue needed to cover the cost of the capital expenditure.

Capital expenditures are often employed to improve operational efficiency, increase revenue in the long term, or make improvements to the existing assets of a company. Capital spending is different from other types of spending that focus on short-term operating expenses, such as overhead expenses or payments to suppliers and creditors. 

Investors and analysts monitor a company's capital expenditures very closely because it can indicate whether the executive management is investing in the long-term health of the company.

CapEx and Depreciation

Depreciation is used to expense the fixed asset over its useful life. Depreciation helps to spread out the cost of an asset over many years instead of expensing the total cost in the year it was purchased. Depreciation allows companies to earn revenue from the asset while expensing a portion of its cost each year until the asset's useful life has ended.

For example, if an asset costs $10,000 and is expected to be in use for five years, $2,000 may be charged to depreciation in each year over the next five years. There are several methods used to calculate depreciation. The full value of costs that are not capital expenditures must be deducted in the year they are incurred.

Capital Expenditures Limits

There are capitalization limits, which specify that the price of assets must be greater than to be depreciated over time rather than charged entirely as an expense in the current year. The cost of record-keeping associated with depreciation causes capitalization limits to be put into effect. Costs that are not depreciated and are associated strictly with operational matters are known as operational expenditures.

Types of Capital Expenditures (CapEx)

Below are some of the common types of capital expenditures, which can vary depending on the industry.

Buildings and Property

A purchase or upgrade to a building or property would be considered a capital purchase since the asset has a useful purpose for many years. Purchases of property, plant, and equipment are often facilitated using secured debt or a mortgage, for which the payments are made over many years.

Interest expenses associated with debt financing may be depreciated as well as the cost of the asset. However, costs incurred with an issue of stock would not qualify for depreciation.

Upgrades to Equipment

In the manufacturing industry and other industries, machinery used to produce goods may become obsolete or simply wear out. Upgrades to the equipment are often are needed. If these upgrades are higher than the capitalization limit that is in place, the costs should be depreciated over time. Similar to buildings or property, equipment upgrades are often financed. The cost of this financing may be depreciated as well.

Software Upgrades

Software expenditures are a significant cost for large companies. Costs to upgrade or purchase software are considered CapEx spending and can be depreciated.

Computer Equipment

Technology and computer equipment, including servers, laptops, desktop computers, and peripherals would be capital expenditures.

Vehicles

Companies often need a fleet of vehicles for distribution or to carry out services for customers, such as delivery companies. These vehicles are considered capital expenditures. However, the costs associated with leasing vehicles are treated as operational expenses.

Intangible Assets

Assets for capital expenditures don't all need to be physical assets or tangible, but instead, can be intangible assets. If a company purchased a patent or a license, it could be considered a capital expenditure.

Special Considerations

Capital expenditures usually involve a significant outlay of money or capital, which often requires the use of debt. Given the expensive nature of capital expenditures, investors closely monitor how much debt is being taken on by a company to ensure the money is being spent wisely.

Long-term debt includes debt-servicing costs, such as interest expenses. Companies must generate enough revenue to be able to service the debt payments as well as the interest payments.

Although capital expenditures are an indicator for demonstrating the level of investment in a company by its management, too much debt can put the company into financial trouble.

Also, capital expenditures that are poorly planned or executed can also lead to financial problems in the future. For example, if a company's management team buys new technology that quickly becomes obsolete, the company would be stuck with the debt payments for many years without much revenue generated from the asset.

Some industries are more capital-intensive than others, such as the oil and gas industry where companies need to buy drilling equipment. As a result, it's important for investors to compare the capital expenditures of one company with other companies within the same industry.

Real-World Example of Capital Expenditures

The cash outflows from capital expenditures are listed on a company's cash flow statement under the investing activities section. The cash flow statement shows a company's inflows and outflows of cash in a period.

Capital expenditures are an outflow of cash listed within investing activities. However, if a company borrowed money for capital expenditures, it would be listed as an inflow of cash in the financing activities section and an outflow of cash in the investing activities section.

Below is an example of the cash flow statement for Tesla Inc. for years ending 2017, 2018, 2019, from the company's quarterly financial results.

Capital expenditures are shown as (negative numbers) under investing activities.

  • Tesla listed purchases of property and equipment (highlighted in blue) for $1.3 billion in 2019, $2.1 billion in 2018, and $3.4 billion in 2017.
  • The company also listed as capital expenditures the purchase of solar energy systems (highlighted in blue) for $105 million in 2019, $218 million in 2018, and $666 million in 2017.
Источник: https://www.investopedia.com/ask/answers/112814/what-are-some-examples-main-types-capital-expenditures-capex.asp

Capex vs. Opex

Examples

Capital expenditures include acquiring fixed assets (tangible, e.g. machinery or intangible e.g. patents), fixing problems with an asset, preparing an asset to be used in business, restoring property so that value is added, or adapting it to a new or different use.

Operating expenditures include license fees, maintenance and repairs, advertising, office expenses, supplies, attorney fees and legal fees, utilities such as telephone, insurance, property management, property taxes, travel and vehicle expenses, leasing commissions, salary and wages, raw materials.

Accounting for Capex and Opex

The crux of the matter lies in the way these expenditures are accounted for in an income statement.

Since capital expenses acquire assets that have a useful life beyond the tax year, these expenses cannot be fully deducted in the year in which they are incurred. Instead, they are capitalized and either amortized or depreciated over the life of the asset. Intangible assets like intellectual property (e.g. patents) are amortized and tangible assets like equipment are depreciated over their lifespan.

Operating expenditure, on the other hand, can be fully deducted. "Deducted" means subtracted from the revenue when calculating the profit/loss of the business. Most companies are taxed on the profit that they make; so what expenses you deduct impacts your tax bill.

What is preferred: Capex or Opex?

From an income tax perspectives, businesses typically prefer OpEx to CapEx. For example, rather than buy laptops and computers outright for $800 apiece, a business may prefer to lease it from a vendor for $300 apiece for 3 years. This is because buying equipment is a capital expense. So even though the company pays $800 upfront for the equipment, it can only deduct about $250 as an expense in that year.

On the other hand, the entire amount of $300 paid to the vendor for leasing is operating expense because it was incurred as part of the day-to-day business operations. The company can, therefore, rightfully deduct the cash it spent that year.

The advantage of being able to deduct expenses is that it reduces income tax, which is levied on net income. Another advantage is the time value of money i.e. if your cost of capital is 5% then saving $100 in taxes this year is better than saving $104 in taxes next year.

However, tax may not be the only consideration. If a public company wants to boost its earnings and book value, it may opt to make a capital expense and only deduct a small portion of it as an expense. This will result in a higher value of assets on its balance sheet as well as a higher net income that it can report to investors.

Videos

Operating expenses are sometimes also called Revenue Expenditure. Here are two videos comparing capital and operational expenses.

Capex and Cash Flow

Investors often look not only at the revenue and net income of a company, but also at the cash flow. The reported profit, or net income, can be "manipulated" via accounting techniques and hence the idiom "Income is opinion but cash is fact." Operating expenses directly reduce the Operating Cash Flow (OCF) of the company. Capex does not figure in the calculation of OCF but capital expenditures reduce the Free Cash Flow (FCF) of the company. Some investors treat FCF as a "litmus test" and do not invest in companies that are losing money, i.e. have a negative FCF.

Amazon is an example of a company with very high capital expenses. The following chart, by Benedict Evans, shows the growth in OCF, capex and FCF for Amazon since 2003.

OCF, capex and FCF for Amazon from 2003 to 2014. Operating cash flow has grown significantly, but so has capex, leaving Free cash flow stagnant.
magnify
OCF, capex and FCF for Amazon from 2003 to 2014. Operating cash flow has grown significantly, but so has capex, leaving Free cash flow stagnant.

References

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CapEx stands for capital expenditures, which is money used by an organization to purchase, improve, or sustain physical assets.

Commonly held physical assets include PP&E (property, plans, buildings, and equipment for running and sustaining the business).

In order to explain CapEx further I want to use a fictitious business to illustrate examples in a clear and concise way.

What is CapEx?

Firstly, imagine a company that makes jewelry - like engagement rings. In order to produce rings, the company needs basic materials (gold, diamonds, etc), equipment to turn these raw ingredients into final products, and labor.

Now imagine you own and operate this business.

As the owner of this company you decide that you will buy property (perhaps a warehouse for storing raw materials), equipment (such as a high temperature furnace to smelt gold), or fans to keep the showroom cool and comfortable.

What would you call this property and equipment? How would you account for them? To put it simply, this equipment is a capital expenditure.

Why?

In this case you are quite literally expending capital (money) in exchange for other types of assets to help the business grow.

And that is precisely what CapEx is.

Because buying the machinery, equipment, and property would help the business maintain or increase its operation, we classify these transactions as CapEx.

Another example is Goldspot Pens, a fountain pen store that sells bottled ink and fountain pens, who are investing in new, bigger warehouses for storing their fountain pens and ink. This costs more money, but increases Goldspot Pens' scope of economic performance in the future.

In this simple example, the choice to buy these future economically productive assets represents CapEx.

In summary, CapEx is the money an organization spends to buy, maintain, or improve its assets to increase its scope and economic performance.

How to Calculate CapEx

Now that you know what CapEx is, and are armed with an example of CapEx at a jewelry business, you might be curious how a company calculates CapEx in practice.

There is a simple equation: CapEx is equal to changes in PP&E added to Current Depreciation.

The formula: CapEx = ΔPP&E + Current Depreciation

Let’s break down these parts of the equation to clarify.

  1. CapEx: spending on business critical property or equipment or technology to grow the firm.
  2. ΔPP&E: changes in PP&E recorded on the balance sheet. If a firm buys a machine for $1M, for example, it will mark this machine in the PP&E section (usually under long term assets).
  3. Current Depreciation: a concept that captures the cost of the asset by the useful life of the asset.

Specifically, here are the steps to calculate Current Depreciation.

  • Declare the useful life of the asset (10 years is a fair value to use).
  • Subtract the salvage value of the asset (that is, at the end of year 10 the machine will be worth some value).
  • Divide this value by the starting cost of the asset ($1,000,000)

In this example, let me show you what a depreciation table will yield. The asset starts at $1,000,000 on Day 1 but ends the depreciation cycle at $25,000.

YearBeginning Book ValueDepreciation PercentDepreciation AmountAccumulated Depreciation AmountEnding Book Value
1.$1,000,00010.00%$97,500$97,500$902,500
2.$902,50010.00%$97,500$195,000$805,000
3.$805,00010.00%$97,500$292,500$707,500
4.$707,50010.00%$97,500$390,000$610,000
5.$610,00010.00%$97,500$487,500$512,500
6.$512,50010.00%$97,500$585,000$415,000
7.$415,00010.00%$97,500$682,500$317,500
8.$317,50010.00%$97,500$780,000$220,000
9.$220,00010.00%$97,500$877,500$122,500
10.$122,50010.00%$97,500$975,000$25,000

Now that you know how to calculate depreciation, you can solve CapEx mathematically, using either a Direct or Indirect Method.

Direct method:

  • Amount spent on asset #1
  • Plus: Amount spent on asset #2
  • Plus: Amount spent on asset #3
  • Less: Value received for assets that were sold
  • = Net CapEx

Indirect Method:

  • PP&E Balance in the current period
  • Less: PP&E balance in the previous period
  • Plus: Depreciation in the current period
  • = Net CapEx

If you bought an asset for $1,000,000 and sold it at the end of year 10 for $25,000 your Capital Expenditure would be: $1,000,000 - $25,000 = $975,000.

The Meaning of CapEx in Practice

When you decide to buy equipment today, you are doing so because you believe that the equipment will generate future economic benefits, or profits.

If you didn’t believe this, you likely would not have purchased the property, hardware, or equipment in the first place. Because CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, you will need to justify how the purchase adds economic value to the firm's future.

For this reason, CapEx is considered a capitalized expenditure and not an expense.

This enables you, as the business owner, to match the economic benefits of the items you are buying with the costs in a given period of time.

If you were unable to match the purchase with economic benefits, you would treat the expenditure as an expense and not as an investment.

Summary

Many businesses, but not all, have CapEx.

Think about large companies like Google, AT&T, and Apple with large data centers, 5G networks, and fulfillment centers, respectively. These are all examples of CapEx.

These companies invest in these pieces of land, equipment, and machinery because each firm wants to secure a profitable future.

And without this CapEx, such a future would be harder to obtain.



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Articles

Definitions

1) Overall expenditure

Data on overall expenditure for all countries is based on format laid out in the IMF Government Finance Statistics Manual 1986 (GFSM 1986). The use of the older GFSM 1986 standard, rather than the newer GFSM 2001 is because not all countries report based on GFSM 2001, but the vast majority report based on GFSM 1986. Therefore, under overall government expenditure the categories are;

Overall expenditure – total government expenditure and net lending

Type of Expenditure: this is broken down into:

  • Recurrent expenditure – all payments other than for capital assets, including on goods and services, (wages and salaries, employer contributions), interest payments, subsidies and transfers.

  • Capital expenditure – payments for acquisition of fixed capital assets, stock, land or intangible assets. A good example would be building of schools, hospitals or roads.However, it is important to note that much donor-funded “capital” expenditure, though referring to projects, includes spending on non-capital payments.

 Sources of funding: these are broken down into

  • Foreign grants – all non-repayable unrequited payments from governments or international organisations, including budget support, project grants or debt relief.

  • Net external finance – repayable Government financing transactions with non-resident individuals, enterprises, governments and international organisations. This includes short/long-term bonds, loans and any other liabilities.

  • Government revenue – includes government tax, non-tax revenue (property income, administration fees, fines) and capital revenue (sales of assets or stocks).


2) General definitions for all sectors

Under the various sectors GSW also breaks down expenditure by type and by source, using governments own budget related documents. The breakdown by type is the same as for overall expenditure (capital vs recurrent). However, the breakdown by source is different as follows:

Donor funded – the sum of grants and external finance disbursements. Typically this is only known for capital expenditure, as recurrent budget support expenditure is not normally classified by sector, although please see individual country pages for clarification. Only onbudget donor funding is included 

Government funded - this is the remaining amount of sector expenditure net of donor funded expenditure. This acts only as an initial estimate of government funded expenditure, as recurrent spending may include some elements of donor budget support.

3) Definitions of individual sector spending

Agriculture includes all general agriculture, including irrigation, fishery and livestock. Forestry is included in many countries, if it is contained in the same ministry budget as agriculture, and is therefore assumed to be linked to agricultural purposes. 

Education includes all on budget pre-primary, primary, secondary and tertiary education, as well as any adult learning programmes. In cases where an education component is linked to other sectors (medical schools attached to hospitals, or agriculture training institutions), this has been linked to those other sectors (please refer to individual country definitions).

Primary Education is a sub set of education expenditure, and in most countries also includes pre-primary expenditure.

Environment includes waste management, pollution abatement and the protection of biodiversity and landscapes. Where forestry expenditure is clearly linked to sustainable management this has also been included.

Gender includes any expenditure by agencies which are explicitly responsible for the empowerment and development of women and on gender issues, except social transfers.

Health includes all spending for the sector, from primary through to tertiary.

Social protection is often split across many agencies of government. Therefore we used specific guidelines to calculate spending levels. This meant excluding spending disbursed via other sectors, such as health, education and agriculture; as well as civil service pensions which are not specifically targeted at the poor. It included spending on employment programs targeted at the poor, food security (if clearly separated from agriculture), disaster mitigation/management, social transfers and other social security schemes. However, in a few cases it was not possible to remove civil service pensions from overall welfare spending, making expenditure much higher than in other countries. It is strongly advised to read the individual country definitions in relation to social protection expenditure.

Water and Sanitation includes the provision of water supply (including regulatory bodies), waste water management. Irrigation expenditure tends to be classified as agriculture expenditure, but there may be cases when this is impossible to take out of water budgets. Generally, water resource management, such as large dams and other infrastructure projects, is excluded. This is because such expenditure tends to not be targeted primarily at providing safe drinking water (i.e.it tends to focus on energy production). In some rare cases when it is possible to extract water resource management that is clearly and specifically targeted towards providing drinking water rather than the energy sector, this expenditure is counted. In other cases where it is impossible to disaggregate from overall spending this might be included.

Debt and Defence.  Debt and defence data are available for limited years, in order to allow users of the data to compare government spending on the MDGs to spending on debt service and defence. While analysing budgets, GSW researchers have identified a clear link between high levels of debt service and defence spending, and lower levels of MDG spending. We have therefore added in new data in 2014 to enable users of the GSW site to compare their governments spending against these “less desirable” areas of spending – enabling users to look at where their government may be spending on areas which are potentially “crowding out” MDG spend. However, this is currently limited in years, and it cannot be broken down in the same way as other data into type and sourced of funding.

Debt data sources & more information.  Data on debt servicing is sourced separately from the rest of GSW data. The data is ONLY available for planned 2013, and is not broken down recurrent/capital or government/donor. It is drawn from IMF LIC-Debt Sustainability Framework and MIC-Debt Sustainability Framework annexes, as well as other budget tables, in IMF staff country reports for 2014 and 2015.

Defence sources & more information. Data on defence spending is available for 44 GSW countries and is sourced separately from the rest of GSW data. Data for this was taken from the Stockholm International Peace Research Institute (SIPRI).

Sources

The vast majority of data sourced by Government Spending Watch (GSW) are from governments themselves, mostly from published documents such as budgets, budget execution reports, or sectoral reports. Almost all sectoral data is from these sources apart from data on debt and defence (see below sector definitions for more information on this).

In most cases we have had to look beyond data which are publicly available on government websites and to assemble with the help of government officials, data which are public but not on the web. We are most grateful to them for their help.

For background data to calculate overall expenditures, GDP, exchange rates etc, we have used data from international organisations that have a direct relationship with government and their expenditure management. In particular;

  • IMF world economic outlook (WEO) database - September 2012

  • World Bank BOOST data

  • World Bank data

Finally, GSW has in some instances, used information from external organisations, such as research institutes or NGOs (an example is The NGO Forum on Cambodia), where their data was verified as accurate, by assessing certain aspects of it with government or International financial institutions data.

For more detailed country-specific information on source documents, please see the first page of each country data excel download file.

Источник: https://www.governmentspendingwatch.org/component/content/article/8-govt-spending-site/7-definitions-and-sources

Capital vs Current Expenditures

The age-old question of taxation: is the expenditure incurred by the taxpayer a capital or a current expenditure? In this instalment, we will see the criteria that must be analyzed in order to determine the type of expense, and analyze certain interesting real-life cases on this topic.

Determination Criteria - Current vs Capital Expenditures

Unfortunately, the Income Tax Act (ITA) does not provide any guidance as far as distinguishing between current and capital expenditures. What we have to base ourselves on is the jurisprudence dealing with this question (see below for examples), and the administrative position of the CRA. No single criterion listed below is more important than any other. All of them are relevant and each should be considered in relation to the other rather than as separate tests. Also, the facts and circumstances of each case have to be considered.

The authoritative document which lists the determination criteria is S3-F4-C1, General Discussion of Capital Cost Allowance.

Enduring Benefit

An expenditure will normally be considered a capital expenditure if it is determined that it has an endurable benefit. For example, the changing of a roof of a building, or the re-bricking of a building are examples of expenditures that would be capital in nature due to their enduring benefit. Any expenditure that is recurring and has a short useful life would be considered a current expenditure, and deductible against income as per ITA 18.

Maintenance or Capital Improvement

Any expenditure brought to a property to bring it to its original condition will be considered a current expenditure. For example, as provided in the CRA folio mentioned above, the cost to repair or replace wood steps with wood steps would typically be a current maintenance expense. Any expense that improves the property beyond its original condition would ordinarily be considered as a capital expenditure. Using the same example above, replacing the wooden stairs with concrete stairs would be considered a capital expenditure. The fact that the market value of the property might increase with the repair is not a consideration for this criterion.

Integral Part or Separate Asset

A very important consideration is whether the expense is made to repair a part of the asset (integral part), or if the expense is incurred to purchase a property that is a separate asset. Any expense deemed an “integral part” of the asset would be considered a current expenditure. An expense deemed as a separate asset would be considered a capital expenditure. For example, a machine bought and installed in a factory would be considered a separate asset, while replacing the rudder of a ship would be considered an integral part of the ship, and a current expenditure. When determining this criterion, the relative value of the expense (see below) should also be considered.

Relative Value

When considering whether an expense is a current or capital expenditure, you may have to consider the expense in relation to the value of the whole property, the previous average maintenance costs, and annual profits. A good example, as provided by the CRA folio mentioned above, is the replacement of a spark plug vs the replacement of an entire engine of a vehicle. In the first case, since the value of the spark plug in relation to the vehicle is small, it would be considered a current expenditure, while the replacement of the engine, a greater value in relation to the vehicle, would be considered a capital expenditure. 
Readying a Used Property for Rental or Other Use                   
If a used property is purchased, and repairs are brought to that property to render it useable, these repairs would be considered as capital in nature. For example, repairs brought to a rental property for use would be considered capital expenditures.

Anticipation of Sale

Repairs made in anticipation of, or as condition of the sale of the property would be considered as capital in nature.

Interesting Jurisprudence on the Determination Criteria

All the criteria mentioned above, for the most part, were determined through jurisprudence over the years. Below is a list of a few of the more interesting ones, with a short summary.

Johns-Manville Canada v. The Queen, [1985] 2 S.C.R. 46

In this case, Johns-Manville Canada needed to buy an adjacent land to the mining pit they had in order to prevent landslides in the pit. The company considered the expense a current expenditure since there was no ore in the adjacent land purchased, and no depreciation could be taken since there was no prescribed class within the Regulations for the land. Moreover, no depletion allowance was allowed because the land was not used in the mining operations. The CRA considered these expenses as capital in nature due to the relative value of the expenditure.
The judge ruled in favour of Johns-Manville Canada in this case, ruling that the purchase of the land represented bona fide expenses in the course of its regular day-to-day business operations, which meets the criteria for current expenditures under ITA 18(1)a). Moreover, the fact that there was no mechanism in the ITA to recognize this large expense (see previous paragraph) also played a determining role.

Rona Inc. v. The Queen, [2003] TCC 121

In this case, Rona claimed the expenses incurred for professional fees, paid to lawyers, consultants and accountants, in an effort to expand the business, as current expenditures since these expenses were recurring. The CRA argued that these expenses, paid for consulting in the construction of large-format stores for the franchise, construction of large-format corporate-owned stores and acquisition of competitors, have an enduring benefit in nature.
The judge ruled in favour of the CRA for the majority of the claims, ruling that the frequency of the transactions are not an important factor vs the enduring benefit the consulting provided to Rona Inc. in the expansion of their business.

Pantorama Industries Inc. v. the Queen [2005] CAF 135

In this case, Pantorama contracted a third-party consultant, Snowcap, to find and negotiate leases for them at future store sites (Pantorama is a clothing retailer). Snowcap would charge a fixed cost per month, and another variable cost calculated according to the surface area for new leases or the duration of the extension for extended leases. Pantorama claimed both types of expenses as current due to their recurring nature; CRA refused the variable costs and claimed them as capital. The CRA argued that the variable costs were an enduring benefit to Pantorama. Pantorama argued that the variable cost is not any different than the fixed cost that was accepted as a current expenditure.

Pantorama lost their appeal in the Tax Court of Canada; the judge agreed with the position of the CRA by stating that this case was very similar to Rona Inc. v. the Queen (see above). The judge ruled that the frequency of the expense did not matter, Pantorama got an enduring benefit from the expense, and therefore it is capital in nature. This ruling was overturned in the Federal Court of Appeals. The judge at that level ruled that the Tax Court judge erred in his judgment, due to the fact that the circumstances of the Rona decision were different than Pantorama’s. In Rona’s case, their business expanded by using the consultants; in Pantorama’s case, their business was shrinking and consolidating, therefore it is hard to make the argument of an “enduring benefit”. The judge also surmised that had these services been obtained “in-house” in the form of salaries and travel costs, the CRA would have likely accepted these costs as current expenditures; the fact that Pantorama outsourced these services should not hold any bearing.

Источник: https://www.thomsonreuters.ca/en/dtprofessionalsuite/blog/capital-vs-current-expenditures.html

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