C.3 Capital Expenditure

Question 1

What is revenue income?

Answer 1

The money that flows into the business from performing day to day functions. The nature of revenue income depends on the activities that the business is undertaking.

Question 2

What is capital income?

Answer 2

Income received from non-regular (one-off) transactions. The main example is the income generated from the sale of non-current assets. Other examples are loans received by the business and capital invested in the business by the owner or owners of the business.

Question 3

What is capital expenditure?

Answer 3

Money that a business spends on capital items, items that stay within the business for a long period of time.

Question 4

What is a tangible asset?

Answer 4

Land, premises, machinery, equipment, fixtures/fittings and vehicles

Question 5

What is an intangible asset?

Answer 5

Adds value to a business but cannot be touched e.g. goodwill, patents, trademarks and brand name

Question 6

Name five types of revenue expenditure

Answer 6

1. Inventory
2. Rent
3. Heating and lighting
4. Salaries/wages
5. Marketing

Question 7

What is rent?

Answer 7

The costs of using premises which are not owned by the business.

Question 8

What is depreciation?

Answer 8

Over time, assets lose value e.g. a car, machinery, fixtures and fittings, equipment. None can be sold for the same price that they were originally bought for.

Question 9

Name and explain two depreciation methods

Answer 9

1. Straight line depreciation - reduces the value of the asset by the same amount each year.
2. Reducing balance depreciation - reduces the value of the asset by a set % per year. This % is set by a company’s accountant.

Question 10

What do you need to calculate the straight line method?

Answer 10

1. Historic value (purchase price)
2. Expected life of the asset e.g. 5 years
3. Residual value e.g. the scrap/sale value at the end of its life

Question 11

What is the straight line method equation?

Answer 11

Historic value - residual value/expected life = depreciation value per year

Question 12

How do you calculate reducing balance depreciation?

Answer 12

Historic value x 0.20 (20% - decimal of the percentage) = the depreciation
Historic value - the depreciation
So on

Question 13

What would depreciation show as on a statement of comprehensive income?

Answer 13

Expenses

Question 14

What is net book value?

Answer 14

The amount it’s worth now