27 Apr What is Net Capital Spending?
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Net capital spending is the amount that a firm spends on acquiring fixed assets during the year. It is defined as: Net capital spending = Fixed assets at the end of the year – fixed assets at the beginning of the year + depreciation
The net capital spending figure for a firm provides information regarding additions to its fixed assets. To calculate net capital spending, you will need access to three different figures:
What does net capital spending mean?
- Ending net fixed assets (A) – this includes the value of fixed assets such as buildings, machinery, and equipment.
- Beginning net fixed assets (B) – this is the opening balance of the firm’s fixed assets.
- Depreciation expense for the year (C) – the depreciation incurred during the year will need to be added back to arrive at the correct figure of net capital spending.
Ryzane Corporation is a supplier of medical equipment and supplies. In the last six months, it has seen a sharp increase in the demand for its products. It decides to purchase additional machinery so that it can raise the level of production. At the end of the accounting year, a review of Ryzane Corporation’s financial statements reveals the following data:
Example of net capital spending
- Ending net fixed assets = $1,500,000
- Beginning net fixed assets = $900,000
- Depreciation expense for the year = $100,000
A firm’s net capital spending is the increase in its net fixed assets during the year after adding back the depreciation expense.