Q. With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct?

  1. Acquiring new technology is capital expenditure.
  2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

Select the correct answer using the code given below:

  • 1 only
  • 2 only
  • Both 1 and 2
  • Neither 1 nor 2

Answer: (a) 1 only

Notes:
  • Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company. Types of capital expenditures can include purchases of property, equipment, land, computers, furniture, and software.
Debt Financing & Equity Financing
  • When a company borrows money to be paid back at a future date with interest, it is known as debt financing.
  • Debt financing is not considered a capital expenditure.
    • Repayment of loan is an example of capital expenditure. 
  • Equity financing is the process of raising capital through the sale of shares. It is an example of non-debt capital receipts. 
    • Capital receipts are receipts that create liabilities or reduce financial assets. They also refer to incoming cash flows. 
    • Examples of non-debt capital receipts: Recovery of loans and advances, disinvestment, issue of bonus shares, etc.