Question 8 from UPSC CSE 2022 - Economics

Question

With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct?
1. Acquiring new technology is capital expenditure.
2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below:

Accepted Answer

Correct Option: A. 1 only

Strategy: To accurately classify expenditures, match key terms to standard accounting principles:

*   **Capital Expenditure:** Recognize new technology acquisition as a capital expenditure, as it involves acquiring a long-term asset.
*   **Financing Methods:** Understand that debt and equity financing are methods of raising funds (capital receipts), not expenditure types. They are not classified as capital or revenue expenditure.
*   **Elimination:** Use the misclassification of financing methods as expenditures in any given statement to confidently eliminate incorrect options.

Key Info: ## Expenditure Types

*   **Capital Expenditure (CapEx)**: Funds used by an organization to acquire, upgrade, or extend the life of long-term assets such as property, plant, equipment, buildings, and technology. CapEx typically appears as an asset on the balance sheet and is depreciated over the asset's useful life. Examples include purchasing machinery, upgrading technology, or constructing new facilities.
*   **Revenue Expenditure (OpEx)**: Costs incurred in the ordinary course of business operations, such as salaries, rent, or routine repairs, and is fully expensed in the income statement for the period.

## Financing Methods

*   **Debt Financing**: The process by which a company raises funds through borrowing, commonly via loans, bonds, or other debt instruments, resulting in a liability on the balance sheet.
*   **Equity Financing**: Involves raising capital by issuing shares, thereby diluting ownership but not creating a liability.

Both debt and equity financing are classified under **capital receipts**--inflows that increase liabilities or reduce assets. They are not expenditure categories themselves, but rather sources of funds for potential capital or revenue expenditure. Standard accounting does not classify debt financing as capital expenditure or equity financing as revenue expenditure.

## Summary

Capital expenditure is linked to the acquisition or improvement of long-term assets (such as new technology), while methods of financing (debt or equity) pertain to how funds are raised and not the nature of expenditure.

Answer

Option B: 2 only

Answer

Option C: Both 1 and 2

Answer

Option D: Neither 1 nor 2