Investment

Definition

An investment is the allocation of resources, such as capital, to acquire assets with the expectation of generating future income or profit. Investments are often categorized as long-term when they are intended to be held for more than one year.

5 Must Know Facts For Your Next Test

1. Investments in long-term assets are capitalized on the balance sheet and depreciated over their useful life.
2. Capitalized costs for investments include purchase price, legal fees, and any other costs necessary to prepare the asset for use.
3. Expenses that do not add value or extend the life of an asset should not be capitalized but expensed immediately.
4. Long-term investments can include tangible assets like real estate and intangible assets like patents.
5. The distinction between capitalizing costs and expensing them impacts a company's financial statements and tax liabilities.

Review Questions

• What criteria must be met for a cost to be capitalized rather than expensed?
• How does capitalizing a cost affect a company's financial statements compared to expensing it?
• Can you give examples of both tangible and intangible long-term investments?

Related terms

Depreciation:

The process of allocating the cost of a tangible asset over its useful life.

Amortization:

The gradual write-off of the initial cost of an intangible asset over its useful life.

Capital Expenditure (CapEx): Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment.