Final answer:
Capital expenditures are large investments made by a company intended to enhance the long-term productivity and capacity of the business. These investments are capitalized rather than expensed immediately and include purchasing new equipment and upgrading existing ones. They are essential for a firm's growth and vary greatly among industries.
Step-by-step explanation:
Within the context of business and accounting, when a company incurs costs that increase the operating efficiency, productive capacity, or expected useful life of an asset, these are known as capital expenditures. Such costs are not charged to expense immediately; instead, they are capitalized, meaning they are debited to the asset account and then expensed over the life of the asset through depreciation or amortization. This is in contrast to revenue expenditures, which are short-term expenses required for the immediate needs of the business operation.
Capital expenditures may include the purchase of new equipment, upgrading of existing facilities, or investing in research and development projects, all intending to generate future profits. They are distinct from fixed costs such as rent on a factory, which remains constant regardless of the production level. The nature and amount of these expenditures vary greatly among industries, from a computer chip manufacturer requiring an expensive factory to a moving and hauling business with minimal fixed assets.
Firms have several options for raising the financial capital needed for these investments, including attracting early-stage investors, reinvesting profits, borrowing, or issuing stock. Effective investment strategies in physical capital can increase productivity, which is beneficial for the long-term growth of a company.