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C&G‟s Gift Shop has a policy to maintain inventory levels on hand equal to the next month‟s
expected cost of goods sold.
Capital Expenditure Budget (26)
The capital expenditure budget is one of the budget components that make up the financial budget.
Each of the budget components has its own unique contribution to make toward the effective planning
and control of business operations. Some budget components, however, are particularly crucial in the
effective management of businesses. The cash budget and the capital expenditure budget are two of
the most important.
Capital budgeting is the process of identifying, evaluating, planning, and financing major
investment projects of an organization. Decisions to expand production facilities, acquire new
production machinery, buy a new computer, or remodel the office building are all examples of capital
expenditure decisions. Capital budgeting decisions made now determine to a large degree how
successful an organization will be in achieving its goals and objectives in the years ahead. Capital
budgeting plays an important role in the long-range success of many organizations because of several
characteristics that differentiate it from most other elements of the master budget.
First, most capital budgeting projects require relatively large commitments of resources. Major
projects, such as plant expansion or equipment replacement, may involve resource outlays in excess of
annual net income. Relatively insignificant purchases are not treated as capital budgeting projects even
if the items purchased have long lives. For example, the purchase of 100 calculators at $15 each for
use in the office would be treated as a period expense by most firms, even though the calculators may
have a useful life of several years.
Second, most capital expenditure decisions are long-term commitments. The projects last more than
a year, and many extending over 5, 10, or even 20 years. The longer the life of the project, the more
difficult it is to predict revenues, expenses, and cost savings. Capital budgeting decisions are longterm
policy decisions and should reflect clearly an organization‟s policies on growth, marketing,
industry share, social responsibility, and other goals.
For purposes of this exercise, we have assumed that C&G‟s Gift Shop will not incur any capital
expenditures in the upcoming year. As a result, line 26, property, plant, and equipment, remains
constant. Net PP&E (line 28), however, is reduced each period by the addition of depreciation expense
to accumulated depreciation.
Budgeted Accounts Payable (33)
Accounts payable represent amounts owed to other businesses for the purchase of goods and services.
These are usually non-interest-bearing. We have assumed that all of the inventories are purchased on
open account and that the terms of credit require payment in full in the following month. As a result,
accounts payable are equal to the cost of inventories in this example.