Accounting 321: Current Event 2 Presentation
April 17, 2014
Monga, Vipal. “Capital Spending Looks Poised for a Comeback”. Wall Street Journal, 15 April 2014. Accessed 15 April 2014. http://blogs.wsj.com/cfo/2014/04/15/ capital-spending-looks-poised-for-a-comeback/?cb=logged0.8254665907006711
Capital Spending is important to both companies and investors, especially as they decide what to do with excess cash. In 2014 many companies have large amounts of cash on their balance sheets and are now deciding what to do with this. Now as the economy improves capital spending is making a return. As documented by the Wall Street Journal, spending on new plants and other PP&E will help increase future earnings. Companies can only be sustainable in the long term if they invest in future projects and continue to generate strong top line performance. The article cites a quote from Blackrock CEO Larry Fink who shares his belief that companies have spent too much on share buybacks or increasing dividends and too little on capital spending. This is related to accounting because much of the accounting treatment related to PP&E, operating expenses and other types of balance sheet items are the end result of an initial investment in capital expenditures.
Investors and creditors when evaluating a company’s financial statements will take their capital spending into account. Cash sitting as a current asset does not produce any future returns and if not invested in marketable securities only decreases relative to inflation. Thus there is pressure on the company to spend it on positive value projects (capital spending) or return it to shareholders through a dividend payment. The fundamental purpose of producing financial statements is for investors to evaluate a companies financial standing and decide if it is a good investment. Another example of this is when a rating agency such as Standard & Poor’s evaluates a companies debt issuance, created through a note payable, and...
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