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.

Select the correct answer using the code given below:

[UPSC Civil Services Exam – 2022 Prelims]

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: (a)        

Explanation:

Capital expenditure

• It is the expenditure by the government for the development of fixed assets.
• If an item has a useful life of more than one year, it is capitalized (i.e., can be considered CapEx). Capital expenditure is a payment for goods or services recorded – or capitalized – on the balance sheet.
• Capital expenditure is used to create assets or to reduce liabilities.
• It consists of: Long-term investments by the government in creating assets such as roads and hospitals, and
• The money was given by the government in the form of loans to states or repayment of its borrowings.
• Therefore, Acquiring new technology is considered a capital expenditure as it will generate profit in the future time and helps in the creation of new assets. Hence, Statement 1 is correct.
• Debt Financing and equity financing are considered under capital expenditure. Hence, Statement 2 is not correct.