how to calculate capital expenditures
How to Calculate Capital Expenditures
Capital expenditures (Capex) are the expenses made on future assets. The Buzzle article below will explain how to calculate capital expenditures.
Important Statistics:
The total rental and non-rental gross capital expenditures for United Rentals Inc. for the first nine months of 2014 is USD 1.568 billion, as compared to the total rental and non-rental gross capital expenditures for the first nine months of 2013, which was USD 1.570 billion.- As already mentioned, Capex involves expenses to buy assets for tomorrow.
- It is classified into two types, the first one of which involves spending money in order to develop the shelf-life of the existing assets, and the second one involves actually buying assets for future use.
- This former amount is always added in the income statement.
- The company uses this amount in order to expand their operations.
- Examples of long-term assets include property, equipment, machinery, apparatus, patents, etc.
- Let's say, you own a computer company. You have sufficient systems, yet you do not have any backup in case any of the existing systems fail.
- In that case, if you invest in 10 new computer systems, this amount you spend is listed as a capital expenditure.
- Your company's book value is automatically increased by that amount and is recorded in the company's income statement.
- Now, since this is an electronic item, it depreciates with time, and over how much ever time it depreciates (determined by the method the company uses), the value is entered as an annual depreciation value.
- Assume that you buy some furniture for your workplace, for USD 30,000.
- If you believe the useful life of the furniture to be around 5 years, you will need to assume USD 6,000 as a depreciation value.
- The amount used for the purchase is expensed in the income statement over time.
- The depreciation leads to reduced profit and taxation.
- Though already mentioned in the earlier paragraphs, it is vital to remember that there are 2 types of Capex - the expansion expenditures and the maintenance expenditures.
- The maintenance expenditures are expensed in the balance sheet.
- Capex cannot be deducted during the accounting period. Over time, the assets undergo depreciation and amortization.
- Since the expenses are entered on the income statement, there is a depreciation in the asset value, which leads to a lowered profit and a tax saving.
- While comparing companies with regards to Capex, always keep in mind that this amount is different for different companies, and the comparison should be made between industries having a common platform.
- Capex must be capitalized during the accounting phase, in the balance sheet within the asset's shelf life.
- Capex, when recorded on the balance sheet, is termed as a capital outlay.
- Capex is used in the cash flow to capital expenditures ratio, which helps business analysts determine the company's capability to finance future projects.
- Every company needs to set up a minimum capitalized value.
- Sometimes, some assets are expensed irrespective of whether they come under Capex or not. This is done in order to avoid recording details of the depreciation of minimum value assets.