Question

Which of the following statements represents good advice prior to making capital expenditures?

A. Capital expenditures represents borrowed funds that must be repaid in one year or less. It is important to seek the advice of your accountant prior to committing.
B. Capital expenditures represent investment in inventories and expendable type assets that the firm will use in one year or less. It is important to maintain the appropriate level of monthly cash flow to pay for these expenditures.
C. Most firms do not value capital expenditures on their balance sheets, so it is important to stay abreast of the market value of these assets at all times, in case you want to sell them.
D. Capital expenditures are major investments - meaning they require large sums of funds. Companies should weigh all possible options before committing available resources to projects that take significant amounts of funds and extend time.

Answer 1

Statement D provides good advice before undertaking capital expenditures as it emphasizes the need for careful planning due to the large investment and long-term commitment. Capital expenditures involve significant spending on assets for future benefits, funded through various methods such as early-stage investment, reinvesting profits, borrowing, or selling stock.

Step-by-step explanation:

Among the listed statements, the one that represents good advice prior to making capital expenditures is:

D. Capital expenditures are major investments - meaning they require large sums of funds. Companies should weigh all possible options before committing available resources to projects that take significant amounts of funds and extend over time. This is because capital expenditures typically involve spending large amounts of money on assets that will provide benefits over an extended period, such as purchasing machinery with a 10-year lifespan, constructing facilities that last for decades, or embarking on long-term research and development projects.

Firms can secure the financial capital needed for such investments in several ways: from early-stage investors, by reinvesting profits, by borrowing through banks or bonds, and by selling stock. Each of these funding choices comes with different commitments, such as repaying loans with interest regardless of income levels, or selling ownership stakes and answering to shareholders and a board of directors. Therefore, careful planning and consideration are necessary before making capital expenditure decisions.