3.1 - Introduction to Finance

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Capital Expenditure

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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

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2

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

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3

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

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4

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

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5

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

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