Question

 

With reference to the expenditure made by an organization or a company, which of the following statements is/are correct?

 

1. Acquiring new technology is capital expenditure.

2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

 

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Select the correct answer using the code given below:

 

A.1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

 

Answer

 

The correct answer is A. 1 only

 

Capital expenditures, often referred to as CapEx, are financial resources allocated by a company to acquire, enhance, and maintain tangible assets such as property, plants, buildings, technology, or equipment. These funds are typically utilized for new projects or investments undertaken by the company. Examples of capital expenditures include the purchase of property, equipment, land, computers, furniture, and software.

 

Debt financing, on the other hand, involves raising funds for working capital or capital expenditures by issuing debt instruments to individual or institutional investors. Through this method, the company borrows money, and in return, the investors become creditors. They receive a commitment that the principal amount and interest on the debt will be repaid over a specified period. Equity financing, on the contrary, entails raising capital by issuing shares of stock in a public offering. This approach allows individuals or entities to become shareholders and obtain ownership in the company. Both debt financing and equity financing are categorized as forms of capital expenditures.

 

In contrast to capital expenditures, revenue expenditures are ongoing operating expenses required to sustain the daily operations of a business. These expenses are typically short-term in nature and cover costs such as salaries, utilities, maintenance, and supplies.

 

Differentiating between capital expenditures and revenue expenditures is crucial for financial management and reporting purposes. Capital expenditures contribute to the long-term growth and asset base of a company, while revenue expenditures are necessary for the day-to-day functioning of the business.

 

Proper allocation and management of capital expenditures are essential for a company's strategic planning and growth. By investing in capital assets, companies can enhance their productivity, expand their operations, and stay competitive in the market. However, it is equally important to carefully monitor revenue expenditures to ensure efficient cost management and maintain profitability.