Which statement about capital expenditures and operating expenses is true?

Which statement about capital expenditures and operating expenses is true?

• A. Capital expenditures are expensed immediately in the income statement.
• B. Operating expenses are used to acquire long-term assets.
• C. Capital expenditures are long-term asset investments; operating expenses are day-to-day costs.
• D. Both are treated identically for budgeting purposes.

Answer: (C)

Capital expenditures are investments in assets that will be used for many years. They are recorded on the balance sheet and spread over the asset’s useful life through depreciation, rather than being charged to the income statement all at once. Operating expenses, on the other hand, are the ongoing costs of running the business and are expensed in the period they’re incurred, reducing net income for that period. This distinction is why the true statement is that capital expenditures are long-term asset investments while operating expenses are day-to-day costs. The other options mix up where CapEx goes, or imply they’re treated the same for budgeting, which isn’t the case.

Capital expenditures are investments in assets that will be used for many years. They are recorded on the balance sheet and spread over the asset’s useful life through depreciation, rather than being charged to the income statement all at once. Operating expenses, on the other hand, are the ongoing costs of running the business and are expensed in the period they’re incurred, reducing net income for that period. This distinction is why the true statement is that capital expenditures are long-term asset investments while operating expenses are day-to-day costs. The other options mix up where CapEx goes, or imply they’re treated the same for budgeting, which isn’t the case.