CapEx: Definition, Formula, and Examples
CapEx (Capital Expenditure) is the money used by a company to purchase, maintain, or improve its fixed assets.
What is CapEx?
CapEx–short for capital expenditure– is the money spent by a company to purchase, maintain, or improve its fixed assets. Examples of fixed assets include:
- Buildings
- Furniture
- Software
- Equipment
Capital expenditures are long-term investments made by a company in order to increase its current capacity or improve its future performance. CapEx purchases are recorded as assets on the balance sheet of the company’s financial statements, rather than expenses on the income statement.
What Is the Difference Between OpEx and CapEx?
OpEx– operational expenses– are short-term expenses required to meet the needs of a company’s day-to-day operations. Unlike capital expenditures, operational expenses do not add ongoing value or extend the life of existing assets. These types of expenses are reported on the income statement, and they reduce the company’s profit for the year.
CapEx is reported on the balance sheet as an asset because it provides ongoing value to the company over many years. Although it is a cost incurred by the company, it does not appear immediately on the income statement. Instead, the asset is depreciated over many years according to its useful life. The expense is allocated to the income statement ratably over that time.
What Is The CapEx Formula?
The formula for capital expenditures is:
CE = Δ PP&E + Current Depreciation
Where:
- CE = CapEx
- Δ PP&E = Change in property, plant, and equipment
How Do I Calculate CapEx?
CapEx is calculated as the change in property, plant, and equipment (PP&E) plus the current period depreciation expense. The current period depreciation expense appears as a line item on the income statement. You will need to calculate the change in PP&E by looking at the current balance sheet and a prior period balance sheet– or a comparative balance sheet which lists a side-by-side comparison of two periods.
To calculate the change in PP&E for the period, take the PP&E from the current balance sheet and subtract the PP&E from the prior period's balance sheet. You can calculate CapEx over a month, quarter, or year with this method. You’ll simply need to select the correct prior period balance sheet that represents the company’s position at that time.
Example of CapEx
In fiscal year 2022, ABC Company purchased $10,000 of new equipment for its manufacturing plant. ABC also upgraded five of its employees’ existing computers for $5,000 and paid a repairman $2,000 to fix a broken down machine. Of these items, the new equipment and the upgraded computers are CapEx and the machine repair is OpEx. In the same fiscal year, depreciation expense on ABC’s fixed assets totaled $4,000.
How Does CapEx Impact Financial Statements?
When ABC records the new equipment and upgraded computers on its books, it debits fixed asset accounts and credits cash. Fixed assets appear under long-term assets within the asset section at the top of ABC’s balance sheet. Liabilities and equity are also reported on the balance sheet in the second and third sections.
When ABC records the machine repair on the books, it debits an expense account and credits cash. The expense appears on the income statement. The income statement reports income at the top and expenses below, with the net income– or net profit– reported on the bottom line. The machine repair expense will reduce ABC’s net profit by $2,000 for 2022.
How Does CapEx Impact Taxes?
ABC will be able to deduct the full amount of its $2,000 operating expenses in 2022. The $4,000 of depreciation expense is also deductible. If the $10,000 equipment and $5,000 computer upgrades both have useful lives of five years and use straight-line depreciation, their impact on the depreciation expense can be calculated as follows:
- Year 1 depreciation expense on equipment = $10,000 / 5 = $2,000
- Year 1 depreciation expense on computer upgrades = $5,000 / 5 = $1,000
That means $1,000 of the depreciation expense came from existing assets that ABC Company owned before 2022, while $3,000 came from the CapEx purchases made in 2022. Instead of being able to deduct the full $10,000 for equipment and $5,000 for computer upgrades in 2022, ABC Company was limited to only the first year depreciation expense of $2,000 and $1,000.
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What Types of Purchases Are Considered CapEx?
In accounting, an outflow of cash may qualify as a capital expenditure if it gives value to the company for more than one year or extends the useful life of an existing fixed asset. It does not include expenses paid to maintain existing assets at their current condition or return assets to their previous condition, if broken or damaged. If the expense can be considered a repair or routine maintenance, it cannot be CapEx.
Capital Expenditure Purchases
Real Company Example: Target Capital Expenditures in 2022
For its 2022 fiscal year, ending January 28, 2023, Target Corporation reported approximately $5.5 billion in capital expenditures. Its capital expenditure breakdown was $600 million in information technology, $1.2 billion in supply chain improvements, $500 million in new stores, and $3.2 billion in existing store investments.
Target’s capital expenditures increased from $3.2 billion in 2021 to $5.5 billion in 2022. In the management’s discussion and analysis section of the company’s 2022 Form 10-K, Target reported that it invested more in its strategic initiatives such as remodeling stores to include Ulta Beauty shops within existing Targets. It also noted that inflation had an impact on the large increase in capital expenditures from the prior year.
What is CapEx in Real Estate?
In real estate, capital expenditures refer to anything of significant value that improves or extends the life of the property. It does not include common maintenance items or small repairs. For example, maintaining the lawn is not a capital expenditure. On the other hand, replacing a gravel driveway with a paved driveway is a capital expenditure. Other common capital expenditures for real estate include replacing an old roof, adding or replacing the HVAC system, and adding other improvements to the property such as a deck or pool.
Real estate purchases typically qualify as a capital improvement versus a repair or routine maintenance to your property, if it:
- Corrects a defect or flaw in the original design of the property
- Creates an addition or expansion of the property
- Rebuilds the property at the end of its useful life
- Replaces a major component or structural part of the property
- Adapts the property to new use
Additional Resources
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