CapEx or capital expenditures are investments a company makes into long-term assets. These long-term assets are resources the company will use for many years, such as an office building or production machinery. Understanding capital expenditures and how they affect a company’s future financial performance is vital for accountants and business professionals.
In this guide, we’ll go over:
- What Is CapEx?
- Types of Capital Expenditures
- How to Calculate CapEx
- CapEx vs. OpEx (Operating Expenses)
- Showing You Understand CapEx on Resumes
- Related Accounting and Business Skills
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What Is CapEx?
CapEx is a capital expenditure, sometimes called a capital expense, which is money a company uses to purchase, maintain, or expand fixed assets. These fixed assets are non-current, not liquid, long-term resources the company intends to use for more than a year. One of the most common types of fixed assets is property, plant, and equipment or PP&E. PP&E includes buildings and machinery involved in the production process.
So, capital expenditures are investments into these long-term assets with a “useful life” of more than one taxable year. By U.S. Internal Revenue Service (IRS) standards, investments into assets with a useful life exceeding one year need to be capitalized. Capitalizing a cost or investment means considering it as an asset instead of an expense, which involves spreading the cost over the asset’s lifetime.
For example, let’s assume a company plans to spend $5,000 on a machine they expect to use for five years. Rather than claiming that $5,000 payment as an expense and paying it all in the same year, the machine should be considered an asset, and the cost should be capitalized across the machine’s five-year lifetime — so, $1,000 each year for five years. The annual capitalized expenditure ($1,000 for this example) is depreciation on the company’s financial statements.
Who Deals With Capital Expenditures?
CapEx is a key component of the main financial statements: balance sheets, cash flow statements, and income statements. For accountants who typically make these statements, understanding capital expenditures and how they fit in with the rest of a company’s finances is vital. Accountants also need to understand CapEx for tax purposes because the IRS has strict guidelines on how capitalized expenditures are reported and claimed on tax documents.
Additionally, accountants, business owners, and a company’s financial team should all be familiar with capital expenditures for budgeting purposes. For example, the entire team needs to know how much money can be invested in new PP&E and if any existing PP&E should be sold to fund other ventures. A company’s financial team should also know how to use CapEx strategically to benefit the company in the long run.
Types of Capital Expenditures
A capital expenditure involves investing money in fixed assets that benefit the company for more than one year. Fixed simply means the asset is not easily used up or turned into cash — these are long-term resources. There are two primary types of fixed assets: tangible and intangible.
Tangible Fixed Assets
A tangible fixed asset is any physical resource a company will use for more than one year. Most aspects of PP&E are tangible fixed assets. Some examples of capital expenditures on tangible fixed assets include:
- Building maintenance
- Purchasing a new piece of real estate
- Repairing production equipment
- Purchasing and maintaining office equipment such as laptops and printers
- Money spent buying, maintaining, and repairing company vehicles
- Upgrading production machinery
- Buying land
- Renovating office or production spaces
Intangible Fixed Assets
An intangible fixed asset is a long-term resource that cannot be touched or held physically. Some examples of capital expenditures on intangible fixed assets include:
- Purchasing a trademark
- Costs associated with patents and copyrights
- Getting and maintaining business licenses
- Purchasing, renewing, and upgrading software
>>MORE: Learn how assets (alongside liabilities and equity) affect a business’s day-to-day operations with the Chartered Accountants ANZ Accounting and Business Performance Virtual Experience Program.
How to Calculate CapEx
A company’s cash flow statement details capital expenditures in the investing cash flow section, showing cash outflows to fixed assets and inflows from selling them. However, if you don’t have access to the company’s cash flow statement, you can determine how much the company spent on capital expenditures for an accounting period by using details on a company’s balance sheet and income statement.
CapEx = PP&E(current) – PP&E(previous) + Depreciation(current)
Components of the Formula
The current PP&E is the value of the property, plant, and equipment listed on a company’s financial statements. Current means using the value for the accounting period you want to find the total CapEx for. For example, if you are looking for a company’s total capital expenditures for 2022, you’d use the 2022 total value of PP&E from a company’s balance sheet.
The previous PP&E is the value of the property, plant, and equipment listed on a company’s financial statements. Previous means using the value for the accounting period prior to the one you want to find the total CapEx for. For example, if you are looking for a company’s total capital expenditures for 2022, you’d use the 2021 total value of PP&E from a company’s balance sheet.
The depreciation (or amortization for intangible fixed assets) is the annual amount of the fixed asset investment that was spread out over the asset’s lifetime. So, for example, if a company buys a $5,000 piece of equipment it intends to use for five years and capitalizes the cost over that five-year lifetime, the annual depreciation would be $1,000.
For a simple example, let’s consider a company that produces wireless headphones. For fixed assets, the company has:
- A manufacturing plant
- Machinery for manufacturing the headphones
- Two office buildings for housing business, sales, marketing, and administrative operations
- Office equipment for both offices, including printers, computers, and laptops
- Three company vehicles for operational and promotional uses
- A patent for the headphones
- Trademark licenses for the headphones and brand
- A business license
- Software licenses for various aspects of the business
In 2021, this company reported the value of all fixed, long-term assets as $3 million. Due to the sale of some office space and changes to software licensing, this company reported the value of these assets in 2022 to equal $2.5 million. The company reported total depreciation and amortization for 2022 as $1 million.
Using this information, we have the following formula:
CapEx = $2.5 million – $3 million + $1 million
CapEx = $0.5 million or $500,000
Interpreting the Results
The above calculation shows that the wireless headphone company spent $500,000 in capital expenditures for 2022. On its own, accountants can track CapEx annually to see how a company is investing in future growth and expansion or how it has benefited from the sale of long-term assets.
For internal assessments, accountants and financial teams will look at these annual capital expenditure amounts compared to other metrics, like revenue, liabilities, and short-term (or liquid) assets. For example, if the company is overspending on CapEx investments every year, but there is no tangible evidence that it’s growing the company’s revenue, the accountants and financial team will likely need to look into budget adjustments.
Externally, investors may consider a company’s annual capital expenditures to get an idea of how the company is investing in future growth. However, they would also consider other factors, like the company’s annual cash flows and net working capital.
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CapEx vs. OpEx (Operating Expenses)
Operating expenses (OpEx) are also known as revenue expenditures and are the primary counterpart to capital expenditures. While capital expenditures are investments into long-term fixed assets with costs capitalized over a number of years, OpEx involve the expenses that come with running a business day-to-day.
Operating expenses are only purchases that affect short-term assets, such as rent on office space, raw materials for production, office supplies like pens and printer paper, and employee paychecks. OpEx are paid for directly from the company’s revenue, while CapEx are often financed with debt or equity.
>>MORE: Learn more about the different types of expenditures.
Showing You Understand CapEx on Resumes
Because capital expenditures are such a fundamental aspect of finance and accounting, potential employers will likely assume you understand it if you have accounting or business experience. However, you can mention capital expenditures in the description of work or internship experience to help boost other skills.
For example, you can mention a time when you found a CapEx mistake in a company’s balance sheet concerning PP&E. Because of your knowledge of generally accepted accounting principles (GAAP), tax experience, and attention to detail, you were able to catch a mistake that otherwise could have caused serious problems for the company at tax season.
>>MORE: Learn more skills you need for a career in accounting with Forage’s accounting virtual experience programs.
Related Accounting and Business Skills
Accountants, business owners, and members of a company’s financial team should understand how capital expenditures work within a company’s finances. These finance professionals should also know:
- How net working capital (NWC) affects a company’s short-term liabilities
- What other information financial statements, like balance sheets, show
- How to use the accounting equation to ensure accurate financial reporting
- How to calculate simple financial health metrics like the quick ratio
See more skills accountants need for their resumes.
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