Define the difference between capital expenditures and operating expenditures and provide examples of each within a local government context.

Define the difference between capital expenditures and operating expenditures and provide examples of each within a local government context.

• A. Capital expenditures fund salaries and day-to-day utilities.
• B. Operating expenditures fund long-lived assets such as streets and facilities; capital expenditures cover daily operations.
• C. Capital expenditures fund long-lived assets; operating expenditures cover daily operations.
• D. Capital expenditures are only funded through grants; operating expenditures are funded through taxes.

Answer: (C)

Capital expenditures are investments in items that provide benefits for many years, such as streets, bridges, public buildings, parks, or major vehicles and equipment. They are typically planned in a capital budget or capital improvements program, and the asset is capitalized and depreciated over its useful life. Operating expenditures, by contrast, cover the day-to-day costs of running government services and programs, like salaries, utilities, regular maintenance, office supplies, and small-scale expenses, and they are expensed in the year incurred. In a local government context, building a new street or purchasing a fire engine is a capital expenditure because it creates a long-lived asset. Paying police officers, fueling and lighting government facilities, and keeping parks mowed are operating expenditures because they support ongoing operations. Other choices mix up these roles or funding sources. The idea that capital expenditures fund salaries and daily utilities is incorrect, since those are ongoing operating costs. The notion that capital expenditures cover daily operations is the reverse of how budgets are structured. And claiming that capital expenditures are funded only through grants while operating expenditures come from taxes ignores the reality that both types can be funded from taxes, grants, or other sources.

Capital expenditures are investments in items that provide benefits for many years, such as streets, bridges, public buildings, parks, or major vehicles and equipment. They are typically planned in a capital budget or capital improvements program, and the asset is capitalized and depreciated over its useful life. Operating expenditures, by contrast, cover the day-to-day costs of running government services and programs, like salaries, utilities, regular maintenance, office supplies, and small-scale expenses, and they are expensed in the year incurred.

In a local government context, building a new street or purchasing a fire engine is a capital expenditure because it creates a long-lived asset. Paying police officers, fueling and lighting government facilities, and keeping parks mowed are operating expenditures because they support ongoing operations.

Other choices mix up these roles or funding sources. The idea that capital expenditures fund salaries and daily utilities is incorrect, since those are ongoing operating costs. The notion that capital expenditures cover daily operations is the reverse of how budgets are structured. And claiming that capital expenditures are funded only through grants while operating expenditures come from taxes ignores the reality that both types can be funded from taxes, grants, or other sources.