Final answer:
Companies typically capitalize expenditures when they are investments in capital assets that are expected to benefit the company over multiple accounting periods, such as durable equipment and software, structures and facilities. Business investment is crucial for sustaining economic growth and is influenced by profitability and economic conditions.
Step-by-step explanation:
Companies usually do not capitalize any expenditure unless it is an investment in a capital asset that will provide future economic benefits. Capitalized expenditures typically include costs that are expected to produce benefits over multiple accounting periods, rather than being consumed within the current period.
Investment expenditure falls into several categories: producer's durable equipment and software, nonresidential structures, changes in inventories, and residential structures. These investments are aimed at generating profits in the future, and firms use various sources of financial capital such as early-stage investors, reinvestment of profits, borrowing through banks or bonds, and selling stock to fund these endeavours.
During economic expansions, firms are more likely to add capacity because consumer demand is high and profits are rising, which encourages additional investment in new equipment and structures.
This pattern is well documented, as U.S. firms invested a substantial amount in new equipment and structures even during economic downturns with the hope of future profitability. Corporate profits after taxes, adjustments for inventory, and capital consumption are relevant indicators that show profitability trends which can motivate or deter business investment.