Certified Financial Management Specialist Practice Exam

What are capital expenditures used for?

1. Paying off debts

2. Acquiring or upgrading physical assets

3. Distributing dividends to shareholders

4. Maintaining cash flow from operations

The correct answer is: Acquiring or upgrading physical assets

Capital expenditures are crucial for the growth and sustainability of a business as they are investments made to acquire or improve physical assets. These physical assets include property, buildings, machinery, equipment, and other tangible assets that are essential for the production of goods and services. By investing in these assets, a company can enhance its operational capacity, improve efficiency, and potentially increase its revenue generation capabilities over time. The funds allocated for capital expenditures are typically used for long-term benefits rather than immediate operational costs, distinguishing them from items such as debt repayments or cash dividends. While maintaining cash flow from operations and managing debt are important financial activities, they do not specifically relate to the acquisition or upgrade of physical assets, which is the primary purpose of capital expenditures.