Capital Expenditure vs Working Capital

Topics: Generally Accepted Accounting Principles, Inventory, Working capital Pages: 2 (522 words) Published: May 2, 2013
Capital Expenditure vs Working Capital

Capital expenditures are money spent by a company to acquire long-term assets. It is neither for short-term gain nor can be easily translated into cash. These investments are inevitable to ensure the continuing business operations and also for future expansion of the company.

Types of Capital Expenditures

Typically, capital expenditure refers to the expenses that a company incurred to purchase tangible fixed assets and intangible assets. Additionally, capex can cover the costs for repair and maintenance as well as the acquisitions of new business.

Defining Fixed Assets

Fixed assets are non-current assets that the company acquired such as real properties, office equipment like printers, faxes machines, telephones as well as tractors, computers and other production equipment. These items are categorised under company’s PPE account. The PPE account is also called long-term assets account or capital resources account. The fixed assets are subject to depreciation for tax reporting purposes. Therefore, the owners are responsible to employ sound procedures to ensure prompt and accurate reporting of the capital purchases over time. Nevertheless, these non-liquid assets cannot be sold directly to customers.

Defining Intangible Assets

Capex can also be incurred for the intangible investments which include the purchase of intangibles such as licenses, copyrights, patents and computer software. However, under certain circumstances, research and development costs can be capitalized.

Net Working Capital

Net working capital is current assets minus current liabilities. It is also an indicator for a company’s liquidity as it gives analytical prominence to a company’s financial position, particularly how much money it can generate in the next 12 months. Current assets include cash receipts from customers, cash and inventories whilst current liabilities include payments to suppliers, staff costs, taxes due and...
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