Legal Definitions - capital expenditure

Capital expenditures (CapEx) refer to the funds that a company uses to acquire, upgrade, or maintain capital assets. These assets can include buildings, equipment, and other long-term investments that are essential to the company's operations.

CapEx is reflected in the cash flow statement, which shows the inflow and outflow of cash in a business. To calculate CapEx, you can add the current depreciation with the change in plant, property, and equipment (PP&E) from the previous accounting cycle. This measurement shows how much a business invests in capital assets.

• A company purchases a new manufacturing plant to increase production capacity. This is a capital expenditure because it is a long-term investment that will benefit the company for many years.
• A restaurant buys new kitchen equipment to replace old, worn-out appliances. This is also a capital expenditure because the equipment is essential to the restaurant's operations and will be used for many years.
• A business spends money on research and development to create a new product. This is not a capital expenditure because it is an expense that is not expected to generate long-term benefits.

The examples illustrate how capital expenditures are investments in long-term assets that are essential to a company's operations. These investments are expected to generate benefits for many years, which is why they are reflected in the cash flow statement and are an important part of a company's financial planning.