Capital Expenditure Financial Management Slides 13

Question 1

What is revenue expenditure

Answer 1

Expenditures incurred for the day to day running of the business

Question 2

What account is revenue expenditure reported to / written off

Answer 2

Profit and loss account / income statement

Question 3

What is capital expenditure

Answer 3

Expenditure on fixed assets - purchases , extensions or improvement to fixed assets used in the business

Question 4

Where is capital expenditure written off to

Answer 4

Part expected to benefit future periods is carried forward on the balance sheet as fixed assets
The amount deemed to be used up in the current period is expensed to profit and loss account by way of depreciation

Question 5

Is capital expenditure cash inflow or outflow

Answer 5

Cash outflow

Question 6

What is the matching principle

Answer 6

Revenues for an accounting period are matched with the costs and expenses incurred in generating these revenues to give the profit or loss for the period

Question 7

What is the depreciation decision

Answer 7

Determine what portion of the total cost of a fixed assets should be included as a expense

Question 8

According to the matching principle how should depreciation of fixed assets be expensed

Answer 8

The amount to be expensed is that portion of the original cost that has been consumed in generating the revenue for the period

Question 9

What does the “consumed” for depreciation of fixed assets depend on

Answer 9

The useful life of the asset

Question 10

Name the methods of depreciation

Answer 10

Straight line
Reducing balance
Sum of digits

Question 11

Where does straight line method of depreciation write off to

Answer 11

Profit and loss account

Question 12

Formula to calculate straight line method depreciation

Answer 12

(Historic cost - realisable value) / estimated useful life

Question 13

Using the straight line method calculate the depreciation
Original cost €10,000, expected residual value €2,000 and expected life of ten years

Answer 13

Annual depreciation expense =
(10,000 – 2,000)/10
= €800 per year

Question 14

For reducing balance method where is it written off to

Answer 14

A predetermine percentage of the book value is written off to profit and loss account

Question 15

Using reducing balance method calculate
Original expenditure €10,000 and depreciation rate of 15%

Answer 15

➢Year 1 = €10,000 x 0.15 = €1,500
➢Year 2 = €8,500 x 0.15 = €1,275
➢Year 3 = €7,225 x 0.15 = €1,083.75

Question 16

How is the base for depreciation charges calculated for sum of digits method

Answer 16

Add together the digits of the useful life of the asset

Question 17

Name the method similar to declining balance method

Answer 17

Sum of digits method

Question 18

Name the method with the higher rate of decline and it can provide for having no residual value at the end

Answer 18

Sum of digits

Question 19

Calculate depreciation using sum of digits method

Answer 19

Useful life of asset = 10 years
Depreciation per year:
= (Cost of asset – realisable value) x fraction
Year 1 => 10/(10+9+.+2+1) = 10/55 x 8,000= €1,455
Year 2 => 9/55 x 8,000 = €1,309
Year 3 = 8/55 x 8,000 = €1,164 etc.
Year 10 = 1/55 x 8,000 = €145

Question 20

Name the main sources of equity

Answer 20

Owners capital
Outside equity
Debt finance
Grant funding