Net Capital Spending

What is Net Capital Spending?

Net capital spending refers to the net amount the company spends for the purpose of acquiring the fixed assets during a period of time, which provides an indication about the growth in the fixed assets of the company, usually, the expansion phase generally has a high amount of net capital spending.

Net Capital Spending Formula

It can be calculated with the help of below-mentioned formula:

Net Capital Spending = Ending Value of Net Fixed Assets – Beginning Value of Net Fixed Assets + Depreciation Expense for the Current Year

Net-Capital-Spending

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For eg:
Source: Net Capital Spending (wallstreetmojo.com)

Where,

Example

For example, at the beginning of the accounting year 2018, the value of net fixed assets of the company B ltd was $850,000, and the end of the accounting year 2018, the value of net fixed assets of the company was $920,000. During the yearly depreciation expense of the company as charged in the income statement is $100,000.

Using the information, calculate the Net capital spending of the company.

Solution:

  • Beginning value of net fixed assets of the company: $850,000
  • The ending value of net fixed assets of the company: $920,000
  • Depreciation expense for the current year: $100,000
Net Capital Spending Example 1
  • = $920,000 – $850,000 + $100,000
  • = $170,000

Thus the Net capital spending of the company for the accounting year 2018 is $170,000.

Advantages

Disadvantages

Important Points

  • A company which is having a faster rate of growth generally incurs a higher amount of net capital spending. In contrast, the company, which is having a slower rate of growth, typically has less or no spending during the year. Thus the calculation of this spending is essential in order to estimate the growth of the company.
  • It will be equal to zero in case the decrease in value of net fixed assets of the company is equal to its depreciation expense of the current year.
  • Depreciation expense of the current year is added back to calculate the net capital spending during the year because the ending balance of the net fixed assets has been reduced with the depreciation expense of the year.

Conclusion

Thus the net capital spending of the company is increasing in its value of the net fixed assets during the year under consideration after adding the charge related to the depreciation expense of the current year. It provides the light on the growth of the company during the period, which will help the stakeholders of the company, including its investors, creditors, management, in getting the information about the financial health of the company.

This article has been a guide to what is Net Capital Spending?. Here we discuss the formula to calculate net capital spending along with examples, advantages, and disadvantages. You can learn more about financing from the following articles –

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