Question

On which financial statements would you be most likely to find information about capital expenditures related to the purchase of equipment during the past year?

1. Look at the ending balance of the PPE account in the balance sheet
2. Look for a large decrease in cash or large increase in accounts payable on the balance sheet
3. Look for a change in the depreciation expense on the income statement
4. Look at the investing section in the statement of cash flows

Answer 1

To locate information about capital expenditures on equipment, one should examine the investing section in the statement of cash flows, plus potentially the balance sheet and the income statement.

The statement of cash flows provides the most direct evidence of such expenditures.

Step-by-step explanation:

To find information about capital expenditures related to the purchase of equipment during the past year, the most appropriate financial statements would be:

1. Look at the ending balance of the Property, Plant, and Equipment (PPE) account in the balance sheet to see the total value of such assets at the end of the fiscal period.
2. Look for a large decrease in cash or a large increase in accounts payable on the balance sheet, which may indicate recent purchases of equipment.
3. Look for a change in the depreciation expense on the income statement, although this could be due to a variety of reasons beyond just new purchases, such as changes in estimated useful lives or salvage values.
4. Look at the investing section in the statement of cash flows, which specifically lists outflows of cash for investment in PPE, and is the most direct indicator of capital expenditures on equipment.

Capital expenditures are essential for companies as they often relate to spending on assets that will provide future benefits. These capital assets can include machines, factories, or other significant long-term investments. When evaluating investment strategies, it is crucial to consider the financing options for such expenditures, whether through early-stage investors, reinvesting profits, borrowing, or selling stock.

The Statement of Cash Flows provides the clearest insight into capital expenditures as it shows cash transactions related to investing activities, which includes purchases of PPE. Thus, option 4 is usually the most direct way to find this information.