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How to Calculate Capex?
Capital expenditure (Capex) refers to the expenditure made by the businesses in building or procuring capital assets. Capital assets are those which give benefits to the business for a period that lasts more than one year. There are two methods for Capex calculation –
- From Balance Sheet & Income Statement
- From Cash Flow Statement
Let us discuss each of the methods of Capex Calculation in detail.
Top 2 Methods for Capex Calculation
# 1 – Using Balance Sheet & Income Statement
Capex Calculation can be done as follows –
- Net Increase in PPE – The net increase in PP&E during a year can be calculated by deducting the PP&E value at the beginning of the year from the PP&E value at the end of the year as,
- Net Increase in PP&E = PP&E at the end of the year – PP&E at the Beginning of Year
- Depreciation Expense – It can be obtained from the Income Statement
Example #1
ABC Ltd. had the following balances in relation to the Property, plant, and equipment in the financial statements.
Using the above information, the amount of capital expenditures made by the company during the year can be calculated as under:
Example #2
In the financial statement of Larsen and Turbo Limited, for the year ended March 31, 2018, the statement of financial position has the following information about the amount of capital expenditure made by the Company.
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Source: LarsenTurbo.com
#2 – From the Statement of Cash Flows
The amount of capital expenditure incurred by the entity can be interpreted from the cash flows from investing activities, a section of the statement of cash flows prepared by the entity.
Cash flows from Investing activity have the details of both, the amount spent on the purchase of capital assets and the amount received from the sale of capital assets. The amount of outflow for the purchase of capital assets is the amount of capital expenditure made by the entity.
Example #1
XYZ Limited has the following balances pertaining to the capital expenditure in the statement of cash flow of the company.
Using the above information, the amount of capital expenditure made by the company can be computed as under:
Net Capital Expenditure made by Company = 450 – 100
Net Capital Expenditure made by Company =350
Example #2
2. In the financial statement of Larsen and Toubro Limited, for the year ended March 31, 2018, the cash flow statement has following line items in the cash generated from investing activities:
(Extracts from financial statement of Larsen and Toubro Limited)
Source: LarsenTurbo.com
From the above-mentioned example, the calculation of Capex (capital expenditure) made by the company can be done as under:
Amount of Capex made = -1136.78-123.32
Amount of Capex made = -1013.46
Conclusion
Capex made by an entity is majorly reflected in the Non-current assets, property, plant and equipment section of the balance sheet of the entity. Also, the amount of cash outflow made by the company on capital expenditure is shown in the cash flow from investing activities section in the Statement of cash flows. The amount of capex calculated as per the balance sheet approach and cash flow approach might differ due to reasons such as advance received against the sale, which is not yet reflected in asset balances in the balance sheet, amount not yet paid for the purchase of fixed assets, which doesn’t appear in the cash flow from investing activities.
Recommended Articles
This has been a guide to Capex Calculation. Here we discuss the top 2 methods to calculate Capex along with practical examples and explanation. You may learn more about accounting from the following articles –
