Final answer:
Capital expenditure affects corporate financial statements by adding long-term assets to the balance sheet, spreading the cost over time via depreciation on the income statement, presenting cash outflow in the investing activities of the cash flow statement, and altering various financial ratios.
Step-by-step explanation:
Capital expenditure affects financial statements in several ways. When companies make capital investments, such as purchasing long-term assets or undertaking significant development projects, these transactions impact their financial statements. Here are four ways capital expenditure affects the financials:
- Balance Sheet: Capital expenditures appear as an asset on the balance sheet. When a company purchases a new machine or builds a facility, it is recorded as an increase in the company's assets. Over time, these assets will be depreciated, which will reduce the asset's value on the balance sheet.
- Income Statement: On the income statement, the expense is not immediately recognized. Instead, depreciation of the capital asset is recorded as an expense over the asset's useful life, affecting the net income.
- Cash Flow Statement: On the cash flow statement, capital expenditures are recorded as cash outflows in the investing section, which reduces the company's cash balance.
- Financial Ratios: Capital expenditures can impact various financial ratios. Debt-to-equity and return on assets ratios can change significantly due to new capital investments, affecting stakeholders' and potential investors' perception of the company.
The choice of financing for capital expenditures—whether through early-stage investors, reinvesting profits, borrowing, or selling stock—will also affect these financial statements differently.