Updated July 15, 2023
Definition of Capex Calculation
Capex calculation relates to the methods and procedures for calculation of Capital Expenditure being done in an organization in a period of time where capital expenditure are the expenses being done on acquiring the capital assets for the company which will generate future economic benefits to the business and is necessary for running & growing the business.
Explanation
Capital assets are essential to a business as they provide the necessary resources like plant & machinery, land & buildings, and equipment. Furniture, etc., is necessary for running the business and provides future economic benefits to the business in the long run. It is also necessary for the business to spend the funds as per its budget on the capital asset, which is where the CAPEX Calculation plays its part. Capex calculation is a method to calculate the organization’s capital expenditure for a period. It could use to calculate expenditures on a capital asset that should capitalize in the books of accounts.
Formula for Capex
Regarding the Capex Calculation, two methods are available in case capital expenditure calculates for an organization for a particular period. The followings are the methods& formulas for the calculation of Capital Expenditure:
- By using the Balance Sheet and Statement of Profit & Loss (or Income Statement):
- By using Cash Flow Statement:
- The above methods and formulas are useful in calculating the total capital expenditure of a business in a given period of time. The calculation begins with determining the expenditure that needs to be capitalized for each individual asset. Here is the method and formula for calculating the expenditure need to be capitalized for individual assets:
Statement showing Calculation of Cost – Capitalization cost
| Purchase Price of Asset | XXXX |
| Expenses directly related to the acquisition of fixed Asset | XXXX |
| Non-refundable duties & Taxes | XXXX |
| Present Value of expected dismantling | XXXX |
| Cost at the end of useful life | XXXX |
| Total | XXXX |
The cost should not include the following:
- Trade Discount
- Grant
- Scrap from sale units of sample
- Refundable duties & taxes
How to Calculate Capex?
As the formula and methods for the Capex calculation are mentioned in the para, how to use the same for calculation;
- By using a Balance Sheet and Statement of Profit & Loss (or Income Statement)
Total Capital Expenditure = Net Increase in PPE (from PY to CY) + Current Year Depreciation
Where;
Depreciation = Current Year Depreciation mentioned in Statement of Profit & Loss.
- By using Cash Flow Statement
In the Investing Activity section of the Cash Flow Statement, the movement from cash outflow in case of purchase of assets and the movement of cash inflow in case of sale of assets are provided. Through using data, the net capital expenditure can calculate using the formula:
Net Capital Expenditure = Cash Outflow on Purchase of Fixed Assets – Cash Inflow on Sale of Fixed Assets.
- Expenditure to be capitalized in case of Individual Assets
Calculation of capital expenditure-
| Purchase price of Assets | XXXX |
| Add- Import duty and non-refundable taxes will add (if any) | XXXX |
| Add- Loading and unloading charges | XXXX |
| Add- Any borrowing cost paid related to Assets | XXXX |
| Add- Any other expenses incurred related to assets (like employee benefit expenses) | XXXX |
| Add-Initial dismantling cost related to assets (if any) | XXXX |
| Less- Any discount or rebate received | XXXX |
| Total Capital Expenditure | XXXX |
The purchase price of assets will be capital expenditure; any recoverable tax will not be part of the cost of Assets. However, any non-refundable taxes will add to capital expenditure. Any discount received will deduct from capital expenditure. If assets are purchased from an outside country, and import duty is paid, they will add to capital expenditure. Any specific borrowing has taken for the assets, interest on that borrowing would be added to capital expenditure until that assets got ready to use. Any loading and unloading charges paid for assets will be added to capital expenditure. Any expenses incurred initially related to the dismantling of assets will be added to capital expenditure. Any other expenses related to assets will be added until the Asset got ready to use.
Example of Capex Calculation
To understand the concept further, let us take an example;
Example
Let us suppose some extracts of a company’s financials are given, and we need to calculate the company’s capex for the same period.
| Balance Sheet Extract | ||
| Non-Current Assets | 2019 | 2018 |
| PPE | $ 200,000.00 | $ 150,000.00 |
| Statement of Profit & Loss Extract | ||
| 2019 | 2018 | |
| Depreciation Expense | $ 20,000.00 | $ 15,000.00 |
Solution:
Total Capital Expenditure is calculated using the formula given below:
Total Capital Expenditure = Net increase in PPE (from PY to CY) + Current Year Depreciation
Where,
Net Increase in Property Plant & Equipment is calculated as
Net Increase in Property Plant & Equipment = (Value of PPE in Current Year Balance Sheet – Value of PPE in Previous Year Balance Sheet)
- Net Increase in Property Plant & Equipment = ($200,000 – $150,000)
- Net Increase in Property Plant & Equipment= $50,000.00
Depreciation is calculated as
Depreciation = Current Year Depreciation mentioned in Statement of Profit & Loss.
- Depreciation = $20,000.00
Putting the values in the formula;
Total Capital Expenditure = Net increase in PPE (from PY to CY) + Current Year Depreciation.
- Total Capital Expenditure = $50,000.00 + $20,000.00
- Total Capital Expenditure = $70,000.00
Uses of Capex Calculation
Capex calculation is used for the capitalization of fixed assets. Capex calculation is used for the bifurcation of capital and revenue expenditures. Capex calculation is useful for showing the correct picture of profit and loss; if any capital expenditure is considered a revenue expense, it will increase the debit side of profit and loss. Either profit for that year will be decreased, or loss will increase for that year.
Apart from the general use of capex for calculating individual expenses and assets cost, capex is generally used in many ratios to determine the financial capability and production or effective production growth capability of the business in the future.
Conclusion
Capex is the capital expenditure, which reflects in the balance sheet instead of the statement of profit & loss as the revenue expenditure. Capital expenditures do not affect the profit & loss of the current year, but their depreciation does. So, the calculation of Capex revolves around the data available in the PPE section of the non-current asset notes to the balance sheet and the investing activity section of the cash flow statement. The calculation through both methods may differ because the cash flow method only accounts for the transaction as per the cash flow, which may differ from the current situation of purchasing assets. More so, capex calculation helps evaluate the company’s fund investment in its Fixed Assets segment.
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