27 Apr Net Capital Spending
What is Net Capital Spending?
Definition: 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
What Does Net Capital Spending Mean?
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:
- 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.
Net capital spending = (A) – (B) + (C)
It’s important to understand why the depreciation expense incurred during the year is added back in the calculation.
Remember that the ending net fixed assets figure has been reduced by the depreciation expense during the year. It is for this reason that depreciation needs to be added back to arrive at the figure of net capital spending.
What is the objective of calculating net capital spending? This figure provides an indication of the growth in the company’s fixed assets. An organization that is expanding quickly and needs additional capital assets to sustain its growth will have a high net capital spending figure.
Example 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:
- Ending net fixed assets = $1,500,000
- Beginning net fixed assets = $900,000
- Depreciation expense for the year = $100,000
The company’s net capital spending can be calculated in the following manner:
Net capital spending = Ending net fixed assets – Beginning net fixed assets + Depreciation expense for the year
Net capital spending = $1,500,000 – $900,000 + $100,000
Net capital spending = $700,000
A firm’s net capital spending is the increase in its net fixed assets during the year after adding back the depreciation expense.