Capital costs (CAPEX) - what they include, how to calculate

Any entrepreneur invests financial resources in his business for its organization, management, and material support. It is important that these costs pay off, that is, bring the expected effect. One form of such investment is capital expenditure.

Let's consider what types of capital investments are used in business, how to take them into account and calculate their effectiveness.

Capital expenditures in the Chart of Accounts for accounting of financial and economic activities of organizations.

What is capital expenditure (CAPEX)

Capital expenditures are funds that a business uses to acquire, modify, or upgrade fixed assets. Fixed assets include buildings and equipment used in the production process. Capital expenses also include costs for the acquisition of intangible assets (licenses, patents), design and survey work.

Capital expenditures are aimed at increasing financial results and are usually one-time in nature. In particular, such expenses may arise when expanding production, creating a new project, etc.

For example, an industrial enterprise, in order to expand production, acquires a new building to house a production workshop. Or a store selling any goods acquires new storage equipment. Capital expenditures can be made either from the company's own funds or using loans.

Separately, it should be noted that capital costs for manufacturing and trading enterprises differ significantly from similar costs of credit institutions. In banks, the share of capital costs is about 3-4% in the structure of assets. This is due to the fact that banks, in order to increase assets, limit themselves to the acquisition and modernization of equipment for servicing clients, as well as the purchase of intangible assets. Intangible assets of banks can include various software systems and automated settlement systems.

CAPEX and OPEX

In addition to CAPEX, you can find the term OPEX in reporting and specialized literature. These are operational expenses, i.e. expenses for everyday needs. This is not an investment in the future, but payment of current expenses - for example, the acquisition of current assets (in other words, the purchase of goods), payment of wages, etc.

Remember, I wrote above that Yandex does not need to have large CAPEX to increase business margins? But it will have large OPEX, since the work of highly qualified specialists is highly paid.

So, the main operating expenses (OPEX) are:

• Payroll (payroll - employee salaries);
• rent and payment of utilities;
• purchase of current assets (goods and raw materials);
• maintenance of licenses and permits;
• expenses for communication, Internet, telephony, etc.;
• advertising expenses;
• insurance payments;
• taxes, etc.

In short, these are regular payments that are deducted from operating profit. Ideally, profits should significantly exceed OPEX, otherwise the company operates inefficiently. The higher the profit compared to OPEX and CAPEX, the better - it means the business margin is high.

Operating expenses may include depreciation, so you need to look at your statements carefully. In this case, CAPEX is partially included in OPEX.

Some companies reporting under RAS do not consider CAPEX separately at all. If a company operates under IFRS, then it must indicate the size of CAPEX, since capital costs put significant pressure on cash flows, and the investor needs to take them into account.

Types of capital costs (Capex)

So what is capital expenditure? This may include:

1. Expenses for the acquisition of fixed assets.
2. Modernization costs.

It is important to understand that modernization is different from routine repairs. In other words, capital expenditures always increase the cost of an asset, unlike operating costs. For example, replacing windows and doors in an industrial building is a capital expense, and current repairs (whitewashing ceilings, painting walls, etc.) are current or operating expenses.

Equipment modernization means its improvement, improvement, replacement of parts with more modern ones. Repair is the repair of existing parts or the planned replacement of worn-out parts with new, equivalent ones.

From the point of view of accounting and tax accounting, operating (current) expenses are more profitable, because they can be written off as expenses at a time, reducing the taxable base for income tax. As for modernization, its cost increases the cost of the equipment and is written off over its useful life through monthly depreciation.

Very often, disputes arise regarding the attribution of certain expenses to capital or current repairs of fixed assets. The same work can be classified as both repair and modernization. What is the main difference? Modernization is an improvement of fixed assets, and repair work is aimed only at maintaining the operability of the property.

For example, purchasing new, more modern software for production systems can be classified as an upgrade, while upgrading old software to a new version can be classified as an ongoing expense.

Since capital expenditures are associated with increasing the value of assets, such expenditures are aimed at generating profits in the long term.

Cost of employee benefits.

As stated above, you can only capitalize those employee benefits that arise from the construction or acquisition of an asset.

There are two key questions here:

1. What categories of employees are involved in the construction or acquisition of an asset?

The answer is that these DO NOT include general management, general functions, research, marketing and advertising, or training personnel.

It means that:

• You can count the labor of laborers (construction workers), architects and surveyors, or production supervisors (construction). To some extent, you can also use quality control and testing tools (if this work is unavoidable to use the asset).
• You cannot capitalize compensation paid to senior management.

2. What expenses associated with these employees can be capitalized?

The answer is all employee benefits in accordance with IAS 19, namely:

• Current employee benefits (wages, paid leave, etc.);
• Severance benefits;
• Other long-term rewards.

The following items of expense are NOT employee benefits under IAS 19 and are therefore treated separately:

• Travel expenses for your employees,
• Training your employees,

How should you include employee benefit expenses in the value of your asset?

This requires a reasonable distribution method.

For example, you are building a ship. Based on the work schedules, you learn that in 20X1 John:

• worked 1,500 hours on the construction of the ship,
• worked 300 hours on other projects, and
• took 100 hours of paid leave.

The company incurred the following expenses to compensate John for his work:

• Salary: CU 18,000
• Paid leave compensation: CU 1,000
• Payments to the pension fund: CU 2,000

How much of the cost can you attribute to the cost of the ship?

You can include all of these employee benefit expenses allocated on a reasonable basis.

In this case, we can allocate them based on the time spent building the vessel (1,500 hours) and the total work time (1,500 + 300 = 1,800 hours).

For distribution purposes, we count paid vacation time. This means that compensation for paid leave will be allocated to the cost of the vessel. The reason is that the company is required to provide this leave to its employees, and the leave is simply an additional cost for the hours worked.

Calculation:

• Salary: CU 18,000 * 1,500/1,800 = CU 15,000
• Compensation for paid leave: CU 1,000 * 1,500/1,800 = CU890
• Contributions to the pension fund: CU 2,000 * 1,500/1,800 = CU 1,677
• Total: CU 17,500

Note: you only include current year expenses; or expenses incurred in the construction of the vessel.

What indicators determine the amount of capital costs

To calculate CAPEX, a part of the financial plan is provided, where the required amount is allocated from the enterprise’s own capital or it is planned to attract borrowed funds. What does this amount consist of?

1. The initial cost of fixed assets on the balance sheet.
2. Amounts of depreciation expenses planned for the useful life.
3. Amounts of unused depreciation for past periods. What it is? Sometimes fixed assets are not involved in the production process. Perhaps these assets were acquired in order to use them in the future, but for now they are idle and not used. This is called conservation of the object, about which a corresponding act is drawn up. There are also cases when a fixed asset is being restored (reconstruction or modernization). These periods are part of the production cycle, and depreciation is not legally charged during the conservation or restoration periods. But it also happens that the accountant simply forgot to calculate depreciation for a certain period. The amounts of such depreciation charges are also taken into account when planning capital expenditures.
4. The cost of fixed assets that are planned to be purchased.
5. Planned amount of depreciation for new facilities.
6. Residual value of fixed assets as of the last reporting date.
7. The amount of accumulated depreciation as of the last reporting date.

Expenses for operating lease of land.

You may be able to incur some rental costs during the construction of your asset. For example, you can pay rent for the land on which you build your factory.

Can you attribute these expenses to cost?

This question is quite controversial and in fact, the answer depends on how well you can justify your opinion to the auditors.

Let's try to give arguments for a positive and negative answer.

Yes, these expenses are capitalized:

Operating lease expenses may be considered direct if the lease expenses are necessary to bring the asset into the desired condition or move it to the desired location.

Thus, the rent paid for the land under the operating lease on which you construct the building can be included in the cost of the building during construction.

No, these expenses cannot be included in the cost price:

The problem is that these expenses have a completely inconsistent impact on profit or loss. If you capitalize rent only during the construction period and pay subsequent lease payments as they are incurred, then the capitalized lease will be written off through depreciation over the useful life of the asset and the remaining lease payments will be written off immediately. This means that the principle of coordination is destroyed.

In addition, land is a special asset because its useful life is different from the life of the building built on it. The lease payments relate to the “land rights” and not to the building itself.

With the advent of IFRS 16 Leases, which comes into effect from 1 January 2021, you will have to recognize the right to use the assets instead of dealing with operating lease payments, so this dilemma will no longer exist.

What is capital expenditure?

We already know what capital expenditures of an enterprise are. Now let's talk about what the areas of capital expenditures are and consider the features of such expenses for the budget.

Expenses for expansion of production and increase in property value are financed from the following sources:

• equity;
• investments;
• borrowed funds.

So, CAPEX in finance includes the following items:

• investments in new or existing enterprises aimed at purchasing new or improving the condition of existing fixed assets;
• expenses for servicing loans for these purposes (including accrued interest and commissions);
• expenses for major repairs of fixed assets.

What is included in capital budget expenditures? The same expenses, only within the framework of budget financing. The property in this case is state property, and loans are allocated from the federal or regional budget.

Budgetary investments in the form of capital investments in state or municipal property are carried out within the framework of the provided budgetary allocations.

It should be especially noted that loans issued by commercial banks for the purchase or modernization of fixed assets are targeted. The use of an overdraft or credit line with the purpose of “replenishment of working capital” is not provided for such purposes.

Travel expenses.

Can you capitalize travel expenses (hotel, transportation) incurred as a result of travel related to the acquisition of an item of property, plant and equipment?

Or can you capitalize travel expenses for a consultant who comes to your site to perform professional work related to the asset?

If you don't have a compelling case for your auditor, then you shouldn't do it.

The reason is that these costs are associated with personal services rather than moving the asset to the desired location or condition.

However, this area is quite unclear and you will benefit from putting together and presenting good capitalization arguments to your auditor.

If you hire a consultant and you agree to pay them for travel expenses, you should try to negotiate with them to include all of those expenses in their services (i.e., add the cost of the service to the travel expenses) just to be on the safe side.

Other expenses you CAN capitalize:

• Fees for environmental permits certifying that the asset is operating in violation;
• Costs for necessary repairs during the construction phase;
• Costs to remove obstacles on the site (for example, demolition of an old building);

Expenses that cannot or are undesirable to be included in the cost of operating systems:

• Training expenses (never!);
• Costs of searching for a suitable territory, its assessment and feasibility study;
• Advertising and marketing expenses;
• Costs of hiring personnel.

How to calculate capital costs

Capital costs are determined by the formula:

\[ K_{general}=TNIOKR+C+T{log.}+PS+T_{other}+TNA, where \]

​\( R&D \)​ – costs for ​\( R&D \)​;

​\( C \)​ – the cost of the object;

​\( Tlog. \)​ – logistics costs (delivery, storage, etc.);

​\( PS \)​ – cost of production area;

​\( Tother \)​ – other associated costs (installation, adjustment, etc.);

​\( TNA \)​ – the amount of unused depreciation.

Capital costs for loans are calculated as follows:

​\( K_z=K_{general}* \% avg., where. \)​ ​\( \% avg. \)​ – weighted average interest rate.

\[ \%avg.=\frac{S\%tot. – S\%tsz.}{Szobshch.-Stsz.}, where. \]

​\( S\%total \)​ – total amount of accrued interest;

​\( S\%tsz. \)​ – the amount of accrued interest on target loans;

​\( Stot. \)​ – total amount of loans received;

​\( Sts. \)​ – the amount of target loans received.

Loans and investments

Investors who provide Kraft Finance with their savings are guaranteed an income of up to 7.65% per annum. To open a deposit, you must deposit at least 1000 rubles into your account. Additional fees may apply.

The contract is valid for 3-36 months. Early withdrawal of funds is impossible or entails a reduction in the interest rate to 0.1% per annum. The only exception is the “Pension” program, under which it is possible to withdraw up to 25% of the deposit amount.

Interest is accrued monthly or at the end of the contract term. Money is added to the deposit or transferred to the card of any Russian bank. The organization’s website has a calculator that allows you to calculate how profitable the investment will be, taking into account all the details of cooperation.

The fulfillment of Kraft Finance's financial obligations to investors is also guaranteed by the Union of SRO "NOKK", on the basis of which a compensation fund was created. The activities of the CCP are controlled by the Central Bank of the Russian Federation. Cooperation with partners takes place within the framework of Federal Law No. 190 “On Credit Cooperation”.

To conclude a contract, the client will need a passport. You can sign all the necessary papers in the office located at the address: Lomonosovsky Prospekt, 25 building 2. Clients are received 7 days a week. Consultations on cooperation issues are provided free of charge. Original documents posted on the organization's website are available upon request.

Partner deposits are used to issue loans to individual entrepreneurs and legal entities. The interest rate depends on the term, amount and value of the collateral (but not less than 19% per annum). Apartments, rooms, private houses and cars are accepted as collateral. The organization guarantees a loan in the amount of at least 50% of the market value of the asset.

Calculation of the efficiency of capital investments

The efficiency of investment is determined using the economic efficiency coefficient:

​\( Ke=\frac{P}{Tot.}, where \)​

​\( P \)​ – profit for the year.

For the manufacturing sector, this indicator is calculated as follows:

\[ Ke=\frac{PT}{Ktotal},where \]

​\( P \)​ – market value of manufactured products;

​\( T \)​ – cost.

For trade, the economic efficiency coefficient is calculated as follows:

\[ Ke=\frac{Trad.nat. – And}{Tot.}, where \]

Banking products on the Russian market

There are not many examples in Russia that focus on the long-term accumulation of funds for their heirs. However, a number of financial institutions include a contribution for the child in their list of services.

As can be seen from the table, the methods of asset allocation differ depending on the institution. In terms of time periods, these are long-term projects, since the period is at least one year. Interest payments are calculated according to a scheme in which the size of finance plays a significant role. It is also noted that the low indicator affects the freedom of action that the investor performs without violating the terms of the transaction.

A married couple opens an account with little cash, but will increase it with the correct use of savings mechanisms.

In addition, the group of offers includes the service of capitalized savings, which simplifies the summation of benefits (a kind of passive income is obtained).

In some banking organizations, for example, in MFC, children's deposits are only for VIP clients. Premium clients have the right to make contributions to the account, having previously deposited at least a million rubles into it.

Also, IK-Bank has approved an investment initiative for disabled children. Consequently, for minors with a standard health category, there are no similar deposits. Therefore, in order to avoid discrepancies, it would be better for citizens to use one of the sites where the functionality of each financial product is broken down point by point and contains comprehensive information. With the help of such tools, even without special education, you will be able to analyze and evaluate, extracting the optimal solution from the abundance of options.

Capex analysis for investors

When investing in capital-intensive manufacturing industries, CAPEX is a very important indicator, since industries such as oil and gas, energy, metallurgy, and communications services companies require constant investment in fixed assets. If you use outdated equipment, profitability will fall, and such a company will no longer be attractive to investors.

It would be useful for an investor to know how to calculate CAPEX based on financial statements. To do this, you need to use the “Cash Flow Statement” (CFS), which is part of the reporting according to International Financial Reporting Standards (IFRS). This report includes a section entitled “Investment Activities.” It is enough to add the values ​​in the lines “Acquisition of fixed assets” and “Acquisition of intangible assets” for the reporting year and subtract the values ​​for the previous year from the resulting amount. This will be the approximate amount of capital costs of the enterprise.

Sometimes the ODDS contains a separate line “Capital costs”. Data from the financial statements of large joint stock companies are available for viewing on official websites. This information is freely available.

For an investor who has chosen a long-term strategy, in addition to capital costs, one must also pay attention to changes in net profit and the size of dividends. In other words, the income of shareholders should not suffer from the fact that the issuer has invested large amounts of funds in the acquisition of new and modernization of existing assets.

You should also take into account the relationship between the amounts of increase in the value of fixed assets and their depreciation. If depreciation exceeds capital costs, the value of assets will fall, which, in turn, will negatively affect the market value of securities, net income and dividends.

Thus, a private investor is recommended:

1. Conduct a comparative analysis of Capex based on financial statements for the previous 2-3 years, using data from the issuer’s official website.
2. Based on the reporting data, conduct a comparative analysis of changes in net profit and dividend payments over the past few years.
3. A long-term investor would do well to compare the amounts of changes in depreciation and acquired fixed assets. The latter must be larger in order to ensure an increase in the value of assets.

associated costs

Mira otros diccionarios:

• FIXED COSTS - Expenses, expenses accompanying, associated with the main production, associated with it. These are the costs of maintaining and operating fixed assets, management, organization, maintenance of production, business trips, employee training, and so on... ... Dictionary of business terms
• overhead costs - expenses, expenses accompanying the main production, associated with it. These are the costs of maintaining and operating fixed assets, management, organization, maintenance of production, business trips, training of workers and... ... Dictionary of economic terms
• fixed expenses - expenses, expenses accompanying the main production, associated with it. These are the costs of maintaining and operating fixed assets, management, organization, maintenance of production, business trips, training of workers and... ... Dictionary of economic terms
• overhead costs - expenses, costs accompanying, associated with the main production, associated with it. These are the costs of maintaining and operating fixed assets, management, organization, maintenance of production, business trips, training of workers and... ... Dictionary of economic terms
• OPERATING EXPENSES - OPERATING EXPENSES Costs of carrying out business activities, with the exception of what relates to fixed costs. O.r. industrial enterprise include factory cost, costs of sales and maintenance of the apparatus... ... Encyclopedia of Banking and Finance
• OVERHEAD COSTS - expenses, costs, accompanying, associated with the main production, associated with it. These are the costs of maintaining and operating fixed assets, management, organization, maintenance of production, business trips, training of workers, and so on... ... Economic Dictionary
• US INTERNATIONAL TRADE COMMISSION - UNITED STATES INTERNATIONAL TRADE COMMISSION USITCAn independent US agency that carries out research, reports and makes recommendations in the field of international trade and tariffs for the President, Congress and other government... ... Encyclopedia of Banking and Finance
• Military budget - Military spending in 2005 The military budget, or defense budget, is the amount of government spending intended to maintain and update the country's armed forces. Military budget of countries ... Wikipedia
• purchase price for a lease - The price paid by a limited partnership to purchase a lease, including legal fees and other related expenses. These amounts are proportionally distributed between... Financial and investment explanatory dictionary
• Service - A service is the result of at least one action necessarily performed during the interaction between the supplier and the consumer, and, as a rule, is intangible. In the Russian Federation, the concept of service is defined in Article 2 of the federal law... ... Wikipedia
• Polyurethane foam - Check neutrality. There should be details on the talk page... Wikipedia

Capitalization of expenses

Using CAPEX in practice

The question may arise: if a company does not report under IFRS, how to calculate capital expenditures? To do this, it is enough to calculate the difference between the value of fixed assets at the end and beginning of the period and add the amount of depreciation for the reporting period.

You can also determine the extent to which an enterprise is able to increase the value of assets using its own funds. To do this, you need to divide the amount of cash flow without borrowing by the amount of capital costs. If the resulting value is greater than 1, this means that the company is able to independently finance capital expenses without resorting to lending. Cash flow is the difference between money coming in and money going out.

Let's give a simple example using the original data:

• cost of fixed assets as of January 1, 2019 – RUB 7,500,000. ($100,000 or UAH 2,900,000);
• the cost of the operating system as of December 31, 2019 is RUB 18,750,000. ($250,000 or UAH 7,250,000);
• the amount of depreciation charges for 2021 is RUB 2,625,000. ($35,000 or UAH 1,015,000);
• cash receipts from customers for 2021 – RUB 41,250,000. ($550,000 or UAH 15,950,000);
• cash expenditure for 2021 (payment to suppliers, payment of wages, expenses for bank services, taxes, etc.) – RUB 28,500,000. ($380,000 or 11,020,000 UAH).

​\( Total \)​=250000-100000+35000=13,875,000 rub. ($185,000 or UAH 5,365,000).

​\( DP \)​=550000-380000=12,750,000 rub. ($170,000 or 4,930,000 UAH).

\[ 170000/185000=0.92. \]

The value we obtained is slightly less than one. This means that the company may need to borrow money to finance capital expenditures. However, the irregularity of capital expenditures should also be taken into account here. Perhaps in this reporting period the company purchased new fixed assets for a large amount, but does not plan to do so next year. Capital expenditures are part of a production cycle that may be longer or shorter than the calendar year we analyze.

More found about capitalization of expenses

1. Corporate fraud: analysis of schemes for appropriating assets and methods of manipulating reporting Unjustified emergence of new assets through capitalization of expenses of fictitious sales of products Transfer of losses to specially created organizations special purpose entities Increase
2. Accounting (financial) reporting: problems of identifying misstatements of information In order to carry out such an operation without going beyond the current accounting standards, companies strive to reflect income in their own accounting and make part of the expenses at the expense of companies under their control capitalization of expenses Companies often resort to illegal capitalization of expenses include them to the value of non-current assets
3. Technological innovation, accounting for R&D expenses and assessing the value of intangible assets at industrial enterprises Thus, the capitalization of R&D expenses in RAS occurs at earlier stages compared to IFRS
4. Identification of distortions in financial statements in an audit The following possible violations occur - the share of marginal income in revenue has decreased, i.e. there are signs of fraud in financial statements - an increase in non-current assets not associated with an increase in the number of fixed assets may indicate unreasonable capitalization of expenses - a sharp change in depreciation charges indicates probable fraud in financial statements -
5. Economic value added: accounting for adjustments in the calculation of profit and capital O 2. conversion of accrual accounting to cash accounting elimination of reserves 3 capitalization of market making expenses incurred in the past 4. elimination of the amount of unusual losses or profits ... NOPAT and CAPITAL are necessary and possible take into account deferred taxation formation of a provision for bad debts R&D expenses marketing research formation of a reserve for future expenses and payments income from passive types
6. Income capitalization method Next capitalization profit capitalization profit capitalization ratio income capitalization expense capitalization market capitalization rate of capitalization capitalization rate decapitalization The page was useful
7. Manipulation of financial statements: schemes and methods of detection Understatement of expenses and, accordingly, an increase in operating and net profit by reflecting expenses that form the cost of sales of goods and services as non-operating expenses and thus underestimating the negative effect of this expense on gross profit Incorrect capitalization of expenses by reflecting them on the balance sheet as assets For example, interest on
8. Evaluation of the results of research and development of R&D The possibility of capitalizing all expenses associated with the implementation of R&D is evidenced by the requirement for their reflection in accounting
9. Problems of accounting for intangible assets A to reflecting them in accounting, their assessment, to writing off expenses in the current period or capitalizing them as intangible assets to determining their term
10. Comprehensive analysis of the financial stability of the company: coefficient, expert, factor and indicative Raising borrowed funds is associated with financial costs, payment for the use of credit resources, financial lease expenses that must at least be covered by current income The main financial ratios ... The main financial stability ratios of the first capitalization group are the following Autonomy coefficient K aut - it is defined as the ratio of the amount of own funds
11. Analysis of financial performance of divisions These adjustments, such as capitalization of research and development or advertising expenses, represent an attempt to represent economic income 2.
12. Formation of a multifactorial criterion for assessing the investment attractiveness of an organization The more active the organization's activities in protecting the environment, the higher the cost of intellectual property, the wider the range of its products, the higher the value of profitability indicators, liquidity turnover, the higher the R&D costs, the length of public roads, the level of salaries of universities nearby, the higher will be... R&D length of roads public use, the salary level of universities nearby, the higher the capitalization of the company will be, and therefore the more attractive it will be for investors. An inverse relationship is observed between
13. Intangible assets in Russian and international practice In international accounting standards, the emphasis is on the impossibility of capitalizing costs on intangible assets if they were initially classified as expenses. Recognition of costs in
14. Model of automatic financial reporting of an enterprise Uc i 100 due to the capitalization of dividends Uc at rate i and cash S - R from proceeds ... S from the movement of attracted and invested funds and expenses R on means of expanded reproduction and on means of servicing the attracted capital WTK
15. Managing financial results: an empirical study in Russia For example, by choosing the method of writing off interest on loans for other operating expenses, you can increase the gross profit compared to using the method of capitalizing borrowing costs
16. Key aspects of managing an organization's profit According to the first approach, the calculation of profit is done according to market data, for example, profit is the difference in the market capitalization of the company at the end and beginning of the period. According to the second approach, profit is the difference between ... In fact, it is the profit remaining after the cost of servicing all capital including own This indicator measures the degree of increase in the value of investments
17. Features of the financial policy of companies in times of crisis. In particular, these are the following measures: inventory of assets and expenses; exit; sale; leasing or liquidation of ineffective assets; increase in equity capital for... In particular, these are the following measures: inventory of assets and expenses; exit; sale; leasing or liquidation of ineffective assets increase in equity capital due to capitalization of profits; reduction in the need for short-term borrowed capital; optimization of product range; reduction in costs; in contrast
18. Features of the analysis of consolidated statements (using the example of analysis of financial leverage indicators) It should be noted that the above calculation of the cost of borrowed capital is not entirely correct, in particular due to the capitalization of interest associated with lending for the acquisition of non-current assets, however, more accurate information on interest expenses
19. Analytical capabilities of consolidated reporting to characterize financial stability This group includes indicators calculated by correlating earnings before interest and taxes with the amount of fixed financial expenses, i.e. expenses that an enterprise is obliged to bear regardless of whether it has a profit or not Calculation formulas ... Capitalization ratios Financial autonomy coefficient of financial independence of concentration of equity capital Equity assets EU TA where
20. Such different goodwill: testing different methods for assessing a company’s goodwill and interpreting the results obtained. A significant difference in the amount of goodwill assessed by the same method is explained by differences in the rules for assessing and recognizing assets, liabilities, income and expenses established by US GAAP and RAS. Based on the calculations made, we can conclude that volume... List of the largest companies by market value capitalization Expert-400. -http www raexpert ru rankingtable table folder expert400 2013 tab2. 20. Directory of settlements

>What is capitalization of costs

Examples

Example 1. In the reporting year, a machine tool manufacturing company expanded its production: new equipment was purchased and the production area was increased. Let's calculate CAPEX and the economic efficiency ratio using the formulas given above, using the initial data:

• cost of equipment (C) – 3,750,000 rubles. ($50,000 or 1,450,000 UAH)
• cost of area (Ps) – RUB 9,000,000. ($120,000 or UAH 3,480,000);
• delivery costs (Tlog.) – 420,000 rub. ($5,600 or 162,400 UAH);
• other expenses: installation and adjustment (Tprot.) – RUB 172,500. ($2,300 or 66,700 UAH);
• market value of manufactured products (P) – 11,250,000 rubles. ($150,000 or 4,350,000 UAH);
• cost (raw materials, wages and other general production and general business expenses) (C) – 8,625,000 rubles. ($115,000 or UAH 3,335,000).

​\( Total \)​=50000+120000+5600+2300=13,342,500 rub. ($177,900 or 5,159,100 UAH).

\[ Ke=\frac{150000 – 115000}{177900}=0.2 \]

The coefficient of economic efficiency of capital investments practically corresponds to the standard value for this industry - 0.21. (Order of the Ministry of Construction of the Russian Federation dated September 14, 1992 No. 209).

Example 2. A trading company purchased a warehouse for storing goods. These expenses were incurred due to the fact that in the reporting year a distribution agreement was concluded with the manufacturer for the sale of a large batch of goods. The property was purchased using loan funds. The initial data is as follows:

• cost of the object (building) (C) – 9,000,000 rubles. ($120,000 or UAH 3,480,000);
• services for delivery and storage of goods (Tlog.) – RUB 750,000. ($10,000 or 290,000 UAH);
• the amount of unused depreciation (the building was not in use for the first 3 months and depreciation was not accrued) (TNA) – RUB 232,500. ($3,100 or 89,900 UAH);
• trade margin or gross profit (the difference between the selling price and the purchase price) (Trading national) – RUB 2,625,000. ($35,000 or UAH 1,015,000);
• distribution costs: wages, taxes, other current expenses (I) – 1,350,000 rubles. ($18,000 or 522,000 UAH).

​\( Total \)​=120000+10000+3100=9,982,500 rub. ($133,100 or UAH 3,859,900).

\[ Ke=\frac{35000-18000}{133100}=0.13 \]

The standard value of the coefficient of economic efficiency of capital investments for trade is 0.25. We got a value almost 2 times less. This suggests that borrowed funds were used to purchase the property.

Cost return

Home » For entrepreneurs » Cost effectiveness

Return to Profitability So, return on assets is a certain ratio of the amount of profit calculated by accountants to the cost of the resources involved in the process of “earning” it. However, of course, we still want to know what kind of profit what we spend brings us, how many “kopecks of profit a ruble of expenses really brings.” And if return on assets is not the metric that can tell us that, then what metric should we use here? This is an indicator of cost effectiveness. It is calculated by relating the amount of profit to the amount of expenses that, according to the accounting methodology, that is, the idea of ​​the matching principle, brought this profit to the company. These are decapitalized expenses, that is, already written off from the balance sheet asset and presented in the income statement. Accordingly, the cost profitability indicator takes the following form: Rz = P/DR, where: Rz - cost profitability, P - profit, DR - decapitalized expenses. Here, as in the case of return on assets, questions must be answered about “what profit” can be used in the calculations and what is considered decapitalized expenses. At the same time, we should immediately get rid of another myth and understand that the return on costs indicator does not show us how what the company spent over the period pays off. In articles devoted to issues of accounting of financial results and analysis of the profitability of organizations, we have already said more than once that the identification of profit with money has been and continues to be the most persistent false association of users of accounting data associated with financial reporting indicators. At the same time, the situation in which accounting reports show us that “there is profit, but no money” continues to be perceived precisely as an accounting paradox. In reality, a company spends exactly money and receives exactly money, and the desire to get more of what is spent is the basis of any commercial activity. It is the famous formula “M - T - M'” that explains the content of the economic life of society.

And expenses are the company’s cash expenses. However, not all of these expenses, thanks to the development of accounting theory, which in practice defeats common sense and the logic of business activity, are recognized as forming current profits. Most of them are capitalized and subsequently decapitalized on the basis of certain methodological techniques generated by the thought of accountant theorists. So, what is reflected in accounting as expenses loses all connection with real cash flows. This means that when assessing the cost-effectiveness, we compare the profit not with what the company spent in the course of its activities, but with an assessment of the part of the expenses incurred by the enterprise, which, according to the principle of correspondence, determined the profit of the reporting period. The conditionality of the amount of such “accounting” expenses is multiplied by the conditionality of the choice of accounting policy for a particular organization. It is by forming an accounting policy in terms of depreciation, the method of valuing inventories, the distribution of semi-fixed expenses, etc., that the company determines the volume of asset decapitalization for the period, that is, the denominator of the cost-effectiveness indicator. This is very important to understand. But, what can we do... Probably, the ability to see space in four dimensions would give us many new opportunities, but for now there are only three dimensions for us. Likewise, the expenses that we can compare with profits are those amounts of decapitalized valuation of assets that are presented in the income statement. This is not bad, and this data, under the necessary conditions, is reliable information - it just has certain boundaries. The reliability of the cost-effectiveness indicator is, of course, enhanced by the fact that the amount of profit is also determined based on the idea of ​​the principle of correspondence, and, therefore, the values ​​that make up the numerator and denominator of our “analytical coefficient” should be considered comparable. It is important to remember that the return on cost indicator demonstrates the degree of return on costs for specific areas of activity and does not reflect the “return” on the resources used by the company. The latter constitutes the objective of the return on assets indicator. Consequently, the answer to the question of what to consider as profit and decapitalized expenses when calculating cost profitability is that, depending on whether we want to determine: 1) the return on the cost of goods (works, services) sold, 2) the efficiency of sales operations in general , or “return” on all expenses associated by the accounting methodology with activities in the reporting period, we can calculate three options for this indicator: 1. Cost profitability indicator, demonstrating the recoupment of the cost of goods (works, services) sold: РЗ = VP/SP, where: RZ - cost profitability, VP - gross profit, SP - cost of sales. 2. Cost profitability indicator, demonstrating the effectiveness of sales operations as a whole: РЗ = PP/(SP + KR + UR), where: PP - sales profit, KR - commercial expenses, UR - management expenses.

3. Cost profitability indicator, demonstrating the “return” on all expenses associated by the accounting methodology with activities in the reporting period: РЗ = PDN/(SP + KR + UR + PU + PR), where: PDN - profit before tax, PU - interest payable, PR - other expenses. So, the return on costs indicator demonstrates how many kopecks of profit are per ruble of expenses, which, according to accounting methodology, are recognized as generating income for the current reporting period, i.e., per ruble of the “cost” of these incomes. Certificate of completed work Commercial proposal Disciplinary action Business from scratch. Part 2 – rental business Deposit

| | Up

Return on costs is a coefficient that shows the amount of income received from one ruble spent and is calculated as the ratio of net profit to the total amount of costs for the creation and subsequent sale of products. Profitability is calculated based on balance sheet data and can be applied both to the entire organization and to its individual divisions.

Where to see the CAPEX value

Companies publish information on the size of CAPEX in the cash flow statement in the consolidated report according to IFRS standards - both quarterly and annual. This data will be recorded in the line “Capital Expenditures” or “Capital Investments”.

In this case, capital costs are considered expenses, therefore they are displayed either with a minus sign or in brackets (in reporting, the numbers in brackets are negative values).

This is how it looks in Gazprom's report.

Sometimes these lines are not there - then you need to go to the “Investment activities” section and look for the lines “Acquisition of fixed assets” and “Acquisition of intangible assets”. For example, Norilsk Nickel.

And sometimes everything looks like this – like Yandex.

An alternative option is to look at the CAPEX sizes and evaluate them over time using reporting aggregator services. For example, on conomy.ru. You need to select the issuer, then the section “Financial reporting” - “DDS report”. Capital investments will be the second line.

Another way is to go to https://ru.investing.com, find the issuer through the search, then go to “Reports” - “Cash Flow”. CAPEX will be determined in the line “Purchase of fixed assets”.

This service, by the way, is convenient to use for analyzing foreign stocks, since only Russian companies are listed on conomy.

Another alternative is blackterminal.ru.

Financing from own funds

cash flow forecast for each alternative project is the basis of the investment project planning process. This is the most difficult of all stages.

When analyzing an investment, it is always appropriate to focus on the cash flows generated by the investment rather than the impact of the investment on net income.

Table 1. Accounting for VAT and sign of input data

Explanation of abbreviations: - the minus sign (-) corresponds to the outflow of funds, is entered into the table with a minus sign (example: -1000). Plus sign (+) for cash inflow. - “with/deduction” - data is entered with VAT, but then compensated - by the amount of tax in the line “VAT deduction”. — “without” — data is entered without VAT. — “with UST, NNS” — data is entered with the Unified Social Tax and the Tax on the possibility of accidents.

I. Investment

The purpose of the first part of the cash flow forecast is to present all material and investment-related expenses. These include not only the cost of new assets, but also other, less obvious expenses. Sunk costs. For example, the costs of researching the feasibility of investments. Because cash flow forecasts are, by definition, forward-looking reports rather than summaries of past events, they have nothing to do with money already spent. Thus, if the cost has already been made, then it is a sunk cost and should not be included in the cash flow forecast.

There is a time lag between the investment and the receipt of any resulting savings (profit). An investment valued using investment planning techniques is generally considered to be held in period zero unless a deferred payment plan is part of the disposition activities for the investment, in which case the investment may actually be carried out over multiple periods.

Cost of equipment. Costs related to fixed assets: - costs of acquiring a land plot and its development; — industrial buildings; — structures; — transfer devices; - cars and equipment; — vehicles; - tools; — economic and production equipment; — liquidation costs (costs of equipment dismantling, protection and restoration of habitat, etc.); - commissioning works.

Costs related to intangible assets: - organizational expenses; - trademark; - industrial model; — licenses, know-how, patents, etc.

The cost of equipment consists of the cost of fixed assets and the cost of acquiring intangible assets.

The installation cost also applies to the zero period. It often consists of many items, which together give the item “Installation cost”. The most significant The most significant component of this item is the cost of labor, i.e. money paid to workers to make installed equipment work. While wages are typically classified as an expense, here they are capitalized, meaning they are included in the cost of the asset.

Other costs associated with the purchase of equipment may also be capitalized. They include freight, delivery and sales tax. In this case, only those costs that relate to the installation of equipment should be considered.

Non-capitalized costs include: - R&D, - taxes for the use of land, - taxes for the use of natural resources, - and so on.

II. Increment of income and expenses (operating activities). The second part of the cash flow forecast describes the economic benefits resulting from the investment. This forecast is similar to a condensed income statement containing items of income, expenses, and taxes on income or loss.

Increased expenses (or savings) on salaries. As a rule, the manager offering the investment must know exactly how the number of jobs will change. If the manager can accurately identify the benefits of wage savings, for example, if he can state that “as a result of the investment, three packaging machine operators will no longer be needed and four more operators will not have to be hired if production expands,” then the salary savings forecast he offers is credible. If the size of salary savings is simply “pulled out of thin air,” then such a savings forecast is doubtful.

Another factor in calculating potential wage savings is the costs associated with hiring and firing workers. You may have to take into account the cost of severance pay or retraining in salary savings.

Taxes should be taken into account when saving your salary. 1. Income tax. Salary is an expense that protects income from income tax. With savings of 56,000 rubles, and an income tax rate of 24%, the net cash flow will be (1 - 0.24) * 56,000 or 42,560 rubles. 2. Unified social tax (UST = ~ 26%). 3. Tax on the possibility of accidents (approximately 1.2%).

Increased costs (or savings) on land rental. The cost of land rental (land use tax) has risen sharply in recent years, so the change in area used must be taken into account.

Increased costs (or savings) on electricity (heating, steam, gas, etc.). If no operating costs have changed as a result of the investment, then they do not need to be included in the cash flow forecast. Only those expenses that have changed and that are significant (caused by the investment) for the investment analysis are considered.

Increased costs (or savings) for operation (repairs). As equipment ages (and with completely new equipment), equipment downtime increases due to more frequent repairs. Repair costs consist of the cost of spare parts, salaries of repair personnel and lost profits from stopping production (if there is no reserve of semi-finished products).

Unlike accounting, in tax accounting, expenses for the repair of fixed assets made by the taxpayer are considered as other expenses and are recognized for tax purposes in the tax period in which they were incurred. These expenses are recognized in the following order: - enterprises of industry, agro-industrial complex, forestry, transport and communications, construction, geology and subsoil exploration, geological and hydrometeorological services, housing and communal services - in the amount of actual costs; - other enterprises - in an amount not exceeding 10% of the original (replacement) cost of depreciable fixed assets. Expenses made by the taxpayer for the repair of fixed assets in the reporting (tax) period, exceeding the 10% limit, are included in other expenses for five years - when repairing fixed assets assigned to the fourth to tenth depreciation groups, and when repairing fixed assets the first to third depreciation groups - evenly throughout their entire useful life.

Depreciation. Although depreciation is a key item in cash flow forecasting, it is the least controllable by managers due to the fact that it is determined according to some mathematical rules. It provides an estimate of the value of an asset over the period of its use.

Depreciation is an important part of investment planning for three reasons: 1. Depreciation is often one of the largest expense items in an investment budget. 2. Since depreciation can be excluded from taxation, accounting for depreciation reduces tax liability. 3. Because depreciation is a non-cash expense and no money leaves the business to pay for it, the business gets to use that money.

One aspect of depreciation that leads to some confusion relates to the common business practice of maintaining two independent depreciation accounts: one for the books and one for taxes. Generally, straight-line depreciation is used on the books and some form of accelerated depreciation is used for tax purposes.

The reason is that with straight depreciation, the company incurs expenses in a calm mode and, therefore, its net income increases, while there are no sharp fluctuations in financial indicators and thus it is easier to carry out financial analysis.

Accelerated depreciation reduces the period of time over which an asset is written off or increases the rate of write-off so that proportionately more expense is attributed to the early stage of the asset's life. Accelerated depreciation provides a reduction in taxes in the first years (periods) and thereby allows you to shorten the payback period of the investment, which means reducing financial risk and increasing the attractiveness of the investment.

Depreciation is an expense, but since... is of a non-monetary nature, it requires special consideration (corrected in Part III).

Read more: “Preliminary calculation of depreciation.”

More details about the procedure for accounting for depreciation can be found in the Accounting Regulations “Accounting for Fixed Assets” dated March 30, 2001 (PBU 6/01) and the Guidelines for Accounting for Fixed Assets, approved by Order of the Ministry of Finance of the Russian Federation dated July 20, 1998 No. 33-n.

Canceled depreciation on replaced equipment. If an enterprise purchases new equipment and the old equipment it replaces is no longer needed (will be sold), but its useful life has not yet expired (depreciation payments are assumed), then the enterprise will not have to deal with depreciation charges for the old equipment in the future. Because These deductions no longer exist (they do not provide tax cover), then they are taken into account as income (adjusted in Part III).

Increasing (decreasing) profits by improving product quality. Example: as a result of an investment, the quality of product packaging improved, which made it possible to increase the price without reducing sales volumes by 3.5 rubles per piece. With a sales volume of 5.5 million units per quarter, there was an increase in profit by 3.5 * 5.5 = 19.25 million rubles. We count it as income.

Increasing (decreasing) profits by reducing production costs. Example: as a result of an investment, the quality of product packaging has improved, but at the same time it has led to an increase in costs for more expensive materials and paints. The cost of production increased by 1.75 rubles per piece. or total profit decreased by 1.75 * 5.5 = 9.625 million rubles. We count it as an expense.

Increase (decrease) in profit due to increased production volume. Example: as a result of the investment, the volume of production and, accordingly, sales increased from 3 thousand units. per quarter up to 3.4 thousand units. Profit from sale 1 pc. goods amounted to 568 rubles. Profit increased by (3.4 - 3.0) * 568 = 227.2 thousand rubles. We count it as income.

Other increase (decrease) in income. 1. Advertising 2. Property insurance 3. Property management costs 4. Property taxes 6. Legal services 7. Land management, grounds maintenance (landscaping, etc.) 8. Removal of garbage, snow (compliance with environmental standards) 9. Collector (sewer).

Property tax rate, % per annum. The value is entered for the case of automatic calculation of the amount of property tax payments (the choice is made in “Preliminary calculation of depreciation” - “Option: Automatic property tax”).

Tax rates are established by the laws of the constituent entities of the Russian Federation and cannot exceed 2.2%.

Profit tax rate, % per annum. Today 24% per annum. First of all, it should be noted that investment expenses themselves are not subject to income tax. From the point of view of income tax, only the items of income and expenses are of interest. In cash flow analysis, income taxes are determined by a given percentage of the income or expenses generated by the investment.

Payment of property tax. If the automatic calculation option is selected, then nothing is entered into this line, but is considered by the program when you click on the “=” or “<” and “>” button. For the case of manual calculation, the value is entered from the keyboard (the choice is made in “Preliminary calculation of depreciation” - “Option: Manual property tax”). When manually calculating, no value is entered in the line “Property tax rate, % per annum.”

Currently, the procedure for imposing this tax has changed significantly and is regulated by Chapter 30 of the Tax Code of the Russian Federation, legislative acts of the constituent entities of the Russian Federation and other regulatory documents. The tax base for property tax is determined as the average annual value of taxable property. Tax rates are established by the laws of the constituent entities of the Russian Federation and cannot exceed 2.2%.

Notes: When calculating property tax, the annual rate is recalculated in accordance with the length of the period.

By default, it is assumed that property is registered in the zero period and tax is accrued from the first period. If this condition is not met (there are capitalized investment costs not in the zero period), then the calculation is done manually.

For replaced equipment, the canceled property tax is taken into account (the sales price of the replaced equipment coincides with its default residual value).

In accordance with Ch. 30 of the Tax Code of the Russian Federation, the deadlines for paying taxes and advance payments are established by the laws of the constituent entities of the Russian Federation, therefore the program has been simplified - the tax is charged at the end of each period, until the value of the property is completely written off.

When calculating the impact of inflation, the amount of property tax payments is not adjusted to the inflation index.

III. Correction of cash flows. This part of the cash flow forecast contains items that are added to or subtracted from Part II income. These adjustments include those items that do not appear on the income statement but that relate to cash inflows or outflows, as well as items that appear on the income statement but do not relate to cash flows. Of all the cash flow adjustments, the most important ones are related to depreciation charges, the increase in working capital and the residual value.

Increase (decrease) in working capital. In accounting terms, working capital is defined as current assets minus current liabilities. Current assets are those of a firm that will be consumed or converted into cash within one year. Current assets include cash, short-term investments, accounts receivable, and inventory.

Current liabilities are those debts of a firm that are due within one year, such as bills or notes due. The difference between them, called working capital, is a certain reserve of funds with which the company pays bills, pays salaries, etc.

When considering the consequences of investment decisions related to working capital, cash flows that are significant to the investment and meaningfully incremental must be carefully examined. For example, when inventory is reduced (as a result of an investment), free funds are released with a value equal to the cost of goods and are taken into account in the cash flow forecast as income.

It is necessary to consider the moment the investment ends (the equipment stops functioning) - how the amount of working capital will change. If an increase in working capital is required, we consider it as an expense.

If the amount of working capital is significant, it is necessary to take into account its change depending on the level of inflation.

Depreciation. In Part II, we were interested in depreciation as an expense that can be used to reduce tax payments. But now we will be interested in depreciation as a non-cash (nominal) expense. Since no money actually leaves the company (and we remember that depreciation is subtracted on the income statement), the company can use these funds (although they may not exist in the form of money, that is, in liquid form). This fact must be taken into account when preparing a cash flow forecast. This is done by adding back money (“refund”) previously deducted as an expense. But let's stop for a moment and look at why you need to subtract depreciation in Part II and add it back in Part III.

Example. Let's consider the impact on the cash flow forecast only of depreciation charges for new equipment.

Part II Depreciation charges for new equipment - 12.5 million rubles Tax savings due to increased expenses (24%) + 3.0 million rubles Net increase (decrease) after tax -9.5 million rubles

Part III Adding non-cash expenses - depreciation + 12.5 million rubles Net cash flow + 3.0 million rubles

Note that by describing depreciation in this way, we get the only monetary effect in the form of a tax reduction. This is as it should be: depreciation is a non-cash expense, and the corresponding tax shelter provides a material benefit.

Canceled depreciation on replaced equipment. The correction is carried out similarly to conventional depreciation only with the opposite sign.

Sale of replacement equipment. If the price of the equipment sold exceeds its original cost on the books, the transaction will be subject to tax.

Residual value of equipment. The concept of residual value refers to the value of assets at the end of the investment period. Since the analysis cannot be carried out indefinitely, the cash flow forecast must be limited to some future point, which must be sufficiently distant so that cash flows outside the time frame of the investment analysis do not have a significant impact on the viability of the project.

One way to evaluate alternative investments is to cut off all cash flows for a longer-term investment at the end of a short-term investment project and estimate the residual value of the project that still has the potential to generate income.

Three methods are used to approximate the residual value of an asset: book value, market value and cash flow potential. The book value of an asset is its purchase price minus the accumulated depreciation to date. However, depreciation (on the books or for taxes) rarely reflects the actual decline in the asset's usefulness. Therefore, book value is usually not the best method for estimating residual value. However, in the absence of better information, it may still be used.

Estimates of the future market value of an asset may be more realistic than its future book value. Unfortunately, it is often quite difficult to predict the market value of used equipment many years in advance. In addition, some types of equipment may only be of value to their owners.

The third method of calculating residual value, which involves estimating the present value of cash flows outside the chosen time frame of the investment, will be the most accurate.

VAT deduction (VAT deductible, VAT offset, VAT refund). Rows of Table 1 marked as VAT “with/deduction” Tax amounts presented to the taxpayer and paid by him when making investment expenses are subject to deductions. “VAT refund” (more details in the help file for the demo version of the program)

Complications

The impact of inflation. Both cash flows, the barrier rate and the level of reinvestment must be adjusted. Since the index of price growth for an enterprise’s products and the resources it consumes may not coincide with the inflation index for the country as a whole, it is calculated separately or taken from sources.

Formula for recalculating discount factors (barrier rate and reinvestment level) taking into account inflation:

1 + a = (1 + r) * (1 + i) = 1 + r + i + r*i, where

a is the barrier rate, fractions of units. (nominal or gross rate, nominal discount factor (inflation is taken into account)); r is the required rate of return, fraction of a unit (in MU it is called the “real interest rate”, the usual discount factor); i — inflation index, fractions of units. (inflation rate (price growth rate), average per interest calculation step).

Example. Investment period is 1 year. The investment amount is 200 thousand rubles. The average annual inflation rate is 12.5%. Desired rate of return (excluding inflation) 24.4%. What amount will be at the end of the year, under the above conditions?

FV = 200 * (1 + 0.125) * (1 + 0.244) = 279.9 thousand rubles

Official inflation forecast (more details in the help file for the demo version of the program).

Sales erosion. So far we have been talking about a special type of investment - machinery and equipment, but investments can take various forms (a new way of distributing products). For example, even when analyzing the cash flows generated by an investment in a new production line, one may encounter certain difficulties. Let us assume that the new production line under consideration will make it difficult to sell the products of the existing line. What should be done to compensate for this? Ultimately, we want to measure changes in sales volumes. Sales erosion (sometimes called “cannibalism”) occurs when a new product is introduced into the market that is very similar to an existing one, causing a decrease in sales of the latter.

Although there is no universal rule of thumb for dealing with this situation, companies generally assume that product innovation is normal in a competitive environment. By regularly updating its products, the company provides itself with an advantage over its competitors. Even though the production of a new product will cause a decrease in sales of the old one, it must be taken into account that if this is not done, the market may be captured by a competitor.

"The price of a chance." Another factor that complicates investment analysis is the use of already purchased equipment to generate investment cash flows. The term “opportunity cost” used here refers to the relative benefit of using an alternative investment option compared to the chosen option. This is usually considered in a difference aspect: if option A will provide an income of 50 thousand rubles, and option B 40 thousand rubles, then the “cost of chance” when choosing B instead of A will be equal to 10 thousand rubles.

The “price of a chance” cannot always be quantified. For example, if option B allows you to establish a relationship that could later be used profitably to obtain a large contract, then the “opportunity cost” will be different (the “opportunity cost” will appear if you choose A instead of B).

Provisions for overhead expenses. Overhead costs can be another complicating factor in investment analysis. Overhead costs (administrative costs associated with production) may be unavoidable with a new investment.

New equipment may require the introduction of a plant supervisor position. From one point of view, the cost of paying his salary should be included in the statement of projected cash flows. Again, the key is the relative nature of these costs. On the other hand, if the business was simply going to allocate funds for overhead costs for new equipment, then this would not represent an additional expense and therefore should not be included in the projected cash flows.

Investment related financing. In most cases, it is relatively easy to separate investment analysis from investment financing issues. However, problems arise where financing is inextricably linked to the investment in question. As a general rule, financing issues should not be considered when preparing the budget for an investment. The commonly used assumption is that similar financing must be found for competing investments. Investments must be able to fend for themselves.

There are two exceptions to this rule. One exception relates to those investments that involve a level of financing not found elsewhere. The most typical example of such financing is preferential government financing.

The second exception to this rule occurs in different long-term rental options. It may be that when comparing the cash flows from a lease to the cash flows from an alternative investment, it will be necessary to introduce debt so that the projects have a basis for comparison. If the choice is made and renting still turns out to be more preferable, then in this case financing should be excluded before starting the cash flow analysis. Leaving financing behind will make the rental project look less attractive than it actually is. However, for most investments—even those that already have a ready source of financing identified—the cash flows associated with borrowings should not be considered in the investment's budget.

Cash inflows and outflows related to financial activities (receipt and repayment of loans, payment of dividends, sale of shares, etc., except for leasing payments) are not taken into account in the analysis of investments (indirectly taken into account in the barrier rate).

Home Methods of financial and investment analysis Investment analysis Financing from own funds

Copyright © 2021 by Altair Software Company. Potential sponsors of programs and projects.

Acquisition of fixed assets

The purchase by an enterprise of expensive objects (equipment, real estate, etc.) that will be included in the operating process usually does not cause difficulties: such expenses are capitalized. But in practice, it often happens that inexpensive objects, spare parts for equipment are purchased, and rented real estate is modernized. In each of these cases, difficulties may arise.

To understand this issue, you should note that according to international reporting standards (IFRS), the purchase of fixed assets is considered capital expenditures.

Consequently, in all of the above methods, when capitalization of expenses is needed, it is necessary to comply with the conditions for recognizing fixed assets. To do this, you will need to meet 4 criteria, the first of which determines fixed assets, and the last two are mandatory conditions for recognition:

1. Objects that are used in operational activities. These are: production of products, provision of services, supply of goods, rental, management, etc.
2. The objects are expected to be used for a long time, many times longer than the duration of the reporting period.
3. Using the facilities increases the likelihood that the enterprise will receive economic benefits in the future.
4. The cost of objects can be estimated.

If all criteria are met, the costs are capitalized. For example, all small office furniture or spare parts and tools are taken into account as a single fixed asset, when the price of one item is small, but the cost of purchasing a batch can be significant for the enterprise.

Features of accounting for capitalized costs

A qualifying asset (its preparation for sale or use requires more than 12 months) during its useful life gradually transfers its value to finished products and services. This part of the costs will be depreciation; they will be taken into account when calculating the cost of finished products.

In accounting documents such costs will be reflected at their original cost. Then their price will be reduced by depreciation charges and, ultimately, will be called residual.

Accounting recognition results in an increase in net income in the current period (since capitalization occurs in the current period and then depreciation is charged over several years), but at the same time the company will pay a larger amount of income tax.

Stages of development of a commercial organization

The process of establishing a commercial enterprise consists of several stages:

• Search and formation of a business idea. At this stage, it is necessary to make initial calculations of future profits. You should also assess risks based on the characteristics of a particular type of business. You can move on to the next stage only if the idea is formed as clearly as possible and does not require modification;
• Search for investors. Money will be needed to purchase funds to support the production sector. Also, in the first stages, money should be spent on purchasing raw materials and paying hired workers;
• Registration of an enterprise. Now the founder must start obtaining a license to conduct commercial activities in a certain area. At the same stage, the organization is registered with the tax service;
• Advertising company. Advertising is necessary to fight competitors and promote the created brand, which no one knows about yet. It is also recommended to carry out promotions that are beneficial to the consumer, which will help make the first sales and arouse the interest and trust of the buyer;
• Expansion of production. When the first profit is received, part of it should be spent on expanding production. This also includes purchasing raw materials, training and hiring more workers, opening offices, purchasing production equipment;
• Capital growth. This occurs due to the successful fight against competitors, which allows the company to enter foreign markets and organize a global transnational corporation.

In order to successfully conduct commercial activities against the backdrop of great competition, attention should be paid to optimizing production, as well as studying market conditions and the impact of advertising on the consumer