Net Capital Spending Formula Example How To Calculate

What is Net Capital Spending?

Net capital spending refers to the net amount the company spends to acquire the fixed assets during a period, which indicates the company’s growth in the fixed assets. Usually, the expansion phase has a high net capital spending.

Net Capital Spending Formula

It can be calculated with the help of the below-mentioned formula:

Net Capital Spending = Ending Value of Net Fixed Assets – Beginning Value of Net Fixed Assets + Depreciation Expense for the Current Year

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Where,

Net fixed assets at the beginning of the period: To know the net capital spending during the year, the opening balance of the net fixed assets of the companyFixed Assets Of The CompanyFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more like the plant, machinery, equipment, etc., at the beginning of the period is required. This information is taken from the financial statements of the company.Net fixed assets at the end of the period: The value of the net fixed assetsNet Fixed AssetsNet Fixed Assets is a financial metric used to calculate the overall value of a firm’s fixed assets. You can calculate it by deducting the total depreciation or liabilities from the total amount paid for all the fixed assets. read more of the company at the end of the period is required. This information is taken from the financial statements of the companyFinancial Statements Of The CompanyFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.Depreciation expense for the year: Depreciation expense refers to the reduction in the value of the assets over some time due to normal wear and tear of the company’s assets. The depreciation expense of the current year is added back to calculate the net capital spending during the year because the ending balance of the net fixed assets has been reduced with the year’s depreciation expense.

Example

For example, at the beginning of the accounting year 2018, the value of net fixed assets of the company B ltd was $850,000, and at the end of the accounting year 2018, the value of net fixed assets of the company was $920,000. Therefore, the yearly depreciation expense of the company as charged in the income statement is $100,000.

Using the information, calculate the Net capital spending of the company.

Solution:

Beginning value of net fixed assets of the company: $850,000The ending value of net fixed assets of the company: $920,000Depreciation expense for the current year: $100,000
= $920,000 – $850,000 + $100,000= $170,000

Thus the Net capital spending of the company for the accounting year 2018 is $170,000.

Advantages

The value of the net capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company’s total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more provides light on the company’s growth. A company with a faster rate of growth generally incurs a higher amount of net capital spending. In contrast, the company, which has a slower growth rate, typically has less or no net capital spending during the year. Thus it is essential to estimate the growth of the company.The value of the net capital expenditure will help the company’s stakeholders, including its investors, creditors, and management, get information about the company’s financial health.

Disadvantages

In case the net capital spending of the company is high, then it shows that the company commits a vast amount of its money to capital expenditures. If the spending does not give the desired results, then the company might have to face huge losses and disturb the company’s cash flows.It requires the right level of planning and budgetingPlanning And BudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more, without which the funds will go in vain.

Important Points

A company with a faster rate of growth generally incurs a higher amount of net capital spending. In contrast, the company, which has a slower growth rate, typically has less or no spending during the year. Thus the calculation of this spending is essential to estimate the company’s growth.It will be equal to zero if the decrease in the value of the company’s net fixed assets is equal to its depreciation expense of the current year.The depreciation expense of the current year is added back to calculate the net capital spending during the year because the ending balance of the net fixed assets has been reduced with the year’s depreciation expense.

Conclusion

Thus the net capital spending of the company is increasing in its value of the net fixed assets during the year under consideration after adding the charge related to the depreciation expense of the current year. Therefore, it provides the light on the company’s growth during the period, which will help the company’s stakeholders, including its investors, creditors, and management, get the information about the company’s financial health.

What is Net Capital Spending?#

Net Capital Spending Formula#

Example#

Advantages#

Disadvantages#

Important Points#

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