Operating and Capital Expenditures
Response to the following problem:
Property, plant, and equipment (plant assets) generally represent a material portion of the total assets of most companies. Accounting for the acquisition and usage of such assets is, therefore, an important part of the financial reporting process.
Required
1. Distinguish between operating (revenue) and capital expenditures and explain why this distinction is important.
2. Briefly define depreciation as used in accounting.
3. Identify the factors that are relevant in determining the annual depreciation and explain whether these factors are determined objectively or whether they are based on judgment.
4. Explain why depreciation is usually shown in the net cash flow from operating activities section of the statement of cash flows.