3.1 - Introduction to Finance

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Capital Expenditure

The finance spent on fixed assets (or non current assets)

These are items of monetary value that have a long-term function for businesses, so can be used repeatedly.

Fixed assets are not intended to be sold (in the short-term) but used for the purpose of production

Revenue Expenditure

Refers to the finance spent on the daily operations of a business

Includes the payment of direct costs and indirect costs involved in producing goods and services

Reasons for Capital Expenditure

• To add extra production capacity as the business grows

• To improve efficiency by utilizing the latest technologies, including IT systems, and production technologies

• To replace worn-out, damaged, and/or obsolete capital equipment and machinery

Why does Revenue Expenditure matter? (expenditure = the action of spending funds)

• Are incurred during the daily operations of the business funded by working capital

• Short-term sources of finance would be used if external finance is needed

• Must be monitored and kept under control in order to maintain profitability

• _________ ______________ are included as “cost of sales” or “expense” on the Profit and Loss account in the period they are incurred

Why does Capital Expenditure matter? (expenditure = the action of spending funds)

• Often involve large amounts of money

• Long-term sources of finance may need to be used

• Businesses may need to assess the value of the investments using investment appraisal techniques

• _______ _____________ are spread over their useful life on the profit and loss account