Questions and Answers
Which of the following is considered capital expenditure?
What type of expenditure is represented by trials and tests conducted on a new asset?
Capital income refers to which of the following?
Which of the following statements about revenue expenditure is true?
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What is the effect of incorrectly recording capital expenditure as revenue expenditure?
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Which of the following is excluded from capital expenditure?
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What categorizes capital expenditure as having a long-term benefit?
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Which of the following would be shown in the statement of profit or loss as an expense?
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Study Notes
Capital Expenditure
- Capital expenditure includes costs incurred for acquiring non-current assets, such as purchase price, delivery costs, and legal fees.
- Subsequent expenditures that enhance the asset's value, trials, and tests are also part of capital expenditure.
- Typically classified as irregular expenses and their benefits are long-term.
- Reflected as non-current assets in the Statement of Financial Position (SOFP).
Revenue Expenditure
- Revenue expenditure comprises costs related to the maintenance and operation of current assets, like repairs, renewals, repainting, administration, and training costs.
- These expenses are regular in nature and provide short-term benefits.
- do not add value to non-current assets and are shown in the Statement of Profit or Loss as expenses.
Differences Between Asset Expenditure and Expenses
- Asset expenditure relates to the acquisition and enhancement of non-current assets, extending their earning capacity, and is irregular.
- Expenses focus on maintaining existing capacity and include losses; they are regular and short-term.
- Misclassification can significantly affect financial statements: asset expenditure misreported as revenue results in understatement of non-current assets and overstatement of expenses; vice versa leads to overstated non-current assets and understated expenses.
Capital Income and Revenue Income
- Proceeds from the sale of non-current assets classify as capital income; profits are recorded in the accounting period of the sale.
- Revenue income arises from selling current assets and includes rent, interest, or dividends received.
Impact on Profit
- Incorrect classification of asset expenditure as revenue expenditure leads to financial statement inaccuracies, impacting reported profit and asset valuation.
- Vice versa can inflate asset values on the SOFP and distort expense reporting in the Statement of Profit or Loss.
Terminology Changes
- Asset expenditure was formerly termed capital expenditure.
- Expense charged through profit or loss was previously labeled revenue expenditure.
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Description
This quiz covers the distinctions between capital and revenue expenditures, particularly in the context of asset acquisition and enhancement. Questions will delve into what constitutes asset expenditure and what is excluded as revenue expenditure. Test your knowledge on the financial implications of asset management.
