With reference to the expenditure made by an organization or a company, which of the following statements is/are correct?
- Acquiring new technology is capital expenditure.
- 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
- 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.