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Capital Expenditure (Capex) | Definition | Methods | Accounting - YouTube
Channel: WallStreetMojo
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today we have topic with us is capital
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its furniture also known as capex if
you go down there is a graph that's when
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that's visible on your screen which sees
regarding Ford Motors capital
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expenditure of Ford Motors from 2010
onwards which was pretty high then there
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was a significant decline mortgage well
down effects afterwards to the point of
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time of one enough two years there was a
significant rise in that and it the the
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rise was followed by consistency over
here as you can see the graph and it was
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$1.981B
that was the capital expenditure that
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was invested no issues let's understand
first what is Capex capital
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expenditure is also known as your capex
it refers to the financial out it refers
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to your financial outlay for the purpose
of buying maintaining or improving the
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fixed asset base ok such as plant
property equipment of the company the
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money spent is considered for the sole
purpose of buying new fixed assets ok
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repairing what we call the existing
fixed assets
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repairing the existing fixed assets or
upgrading the existing capacity of the
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fixed asset and it in from for financial
decision of the company and it must be
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formally be approved by the annual
shareholders meeting or special meeting
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of the board of director now
it includes like buying of fixed assets
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or sometimes intangible assets there is
also repairs that has been done on the
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existing asset to improve its life of
useful assets third upgrading upgrading
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an existing asset to increase its
performance
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okay this other three things now how
exactly we are going to do accounting of
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this particular thing will go step by
step process it going by the general
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rule of capex account if the acquired
property the useful life is longer
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useful life is longer than the taxable
year
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see then the cost must be capitalized so
this cost is not charged to the profit
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and loss statement at once in the
taxable year but is spread over the
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useful life of the asset in the form of
it's called depreciation or amortization
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first what impacts does it have the
impact is you know there is an effect on
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balance sheet so the future or the
entire capital expenditure cost is what
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we call as capitalized on the asset side
of the balance sheet and this increases
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this increases the non-current asset
base of the entity while at the same
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time it's reducing the cash balance of
the entity okay
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second there is effect on the income
statement see the capital expenditure
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cost are amortized or depreciated
through profit and loss statement over
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the useful life of the asset third there
is effect on the CFS cash flow statement
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now since the reduction in the cash
balance of the entity is reflected in
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the balance sheet as at the end of the
taxable year this financial outlay this
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financial outlet does not get reflected
in the CFS that is the cash flow
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statement under the investing activity
okay investing activity section as
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capital spending or purchase of property
plant and equipment acquisition expense
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and so on and so forth okay now let's
understand the formula of capex see
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capex can be calculated using two
methods first is called the gross method
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see capital expenditure formula using
gross method is equal to gross property
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plant and equipment in the year to less
gross property plant and equipment in
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year 2 this is the gross method now
second is called the what we say the net
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it says the capital
expenditure formula using the net better
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is equal to capex is equal to net
property net PPE of your do less net
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property plant and equipment of year 2
plus depreciation in year 2 year it has
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to be 1 not 2 year 1 in a way here
also year one okay so this is this are
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the two method for calculating the
capital expenditures I'll take one
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example of Walmart see if Walmart in
case of the Walmart the cash flow
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statement to decide it's up to the cash
flow statement it can be clearly say
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that in the Walmart had spent closely
around $10051
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or $10050 million
you can see that to by the
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property plant and equipment that was
the expenditure that they made and since
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the expenditure was towards buying the
fixed assets and amount is very huge for
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it to be expensed the income statement
at once at all advanced the expenditure
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could be classified as capex and you
know more information about the enact
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nature of the capex could be found if
one digs into the notes of the company
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which could be found in the financial
filings okay know many ins a pattern
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could be seen in the capital expenditure
of the company now it could reflect the
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company is expanding aggressively as for
the strategic decision of the board of
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the company in order to cater the large
market share in order to cater the large
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market share
see now i want to make you understand
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that you know there is difference
between capex difference it is
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completely different from other
expenditure that you do see some
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industry are more capital intensive and
some are less capital intensive right so
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the capital expenditure of the entity
depending on the industry it operates in
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so capital intensive industry like you
know if you see for oil exploration
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reproduction telecom right you have
manufacturing or utility
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they have the highest level of the
capital expenditures second the capital
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expenditure different from the operating
expenditure okay operating they are
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known as of capex or the revenue
expenditure they are fully
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tax-deductible in the same year in which
the expense are occur and also the
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capital expenditure is non recurring in
nature the it is non recurring strategic
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financial outlay that impacts the long
term asset base or something that could
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not be deducted in the full if the year
in which it was incurred hence it is
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amortized over the useful life or the
useful life of the asset fourth let me
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take you down over here for example you
know buying a new car is capital
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expenditure which could be amortized
over it's useful life generally accepted
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to 5 years by the accounting rules
and industry norms those you know after
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5 years the car could still be in the
working condition okay and its value
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could only be charged to the profit and
loss statement only doing the useful
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life of the tax-deductible purpose now
this were all the details leading to the
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capital expenditure I hope you have got
a great idea regarding it and one other
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concluding in the capital expenditure
decisions are very critical okay or to
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an organization due to the substantial
initial cost and irreversibility and the
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long term effect therefore you know
budgeting for the capex is would
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to be very careful and efficient planned and executed see so that's it for this
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particular topic if you have learned and
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