American Institute of Certified Public Accountants (AICPA) Practice Exam 2025 - Free AICPA Practice Questions and Study Guide

Capital expenditures are funds used by a company to acquire, upgrade, or maintain physical assets such as property, industrial buildings, or equipment. These expenditures are typically substantial investments that provide benefits over a long period, such as improving productivity, increasing efficiency, or expanding operations.

Buying raw materials for production does not qualify as a capital expenditure because it is classified as an operating cost. Operating costs are the expenses incurred in the day-to-day functioning of a business and are typically consumed within a short timeframe. Unlike capital expenditures, which create long-term assets, purchasing raw materials is a recurring purchase that directly impacts the cost of goods sold and income statement in the current accounting period, rather than affecting the balance sheet in the long term.

In contrast, options like purchasing new machinery, renovating an office building, or constructing a new warehouse facility are all examples of capital expenditures because they result in the acquisition or improvement of long-term assets that will provide value to the business over multiple reporting periods.