Here is Question No. 9 a part of our series on UPSC Prelims 2022.
Q9. With reference to the expenditure made by an organization or a company, which of the following statements is/are correct?
- Acquiring new technology is capital expenditure.
- Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Answer (a)
- Statement 1 is correct: Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.CapEx is often used to undertake new projects or investments by a company. Costs to upgrade or purchase software, invest in new technology and computer equipment, are considered part of Capital expenditure. As they are often employed to improve operational efficiency, increase revenue in the long term, or make improvements to the existing assets of a company.
- Statement 2 is incorrect: When a company borrows money to be paid back at a future date with interest it is known as debt financing Repayment of a loan is an example of capital expenditure. Equity financing is the process of raising capital through the sale of shares. It is an example of non-debt capital receipts. Capital receipts are receipts that create liabilities or reduce financial assets. They also refer to incoming cash flows. For example, reliance can choose debt financing, which entails selling fixed-income products, such as bonds, bills, or notes, to investors to obtain the capital needed to grow and expand its operations. Both debt financing and equity financing are considered as part of capital receipts for the company, as capital receipts are receipts that create liabilities or reduce financial assets. Funds from these would be used by the company for capital expenditures such as to grow or expand its operations
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