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ACCA F9 lectures ACCA F9 notes
March 23, 2017 at 12:54 pm
Sir mentioned in the course note chapter 11 retained earnings are the best source of finance ( under the topic ” Internally generated finance” ). whenever we buy an asset ( or expand the business) double entry would be debit -asset and credit – cash. What would be double entry if retained earning is used as a source of finance to buy an asset. Sorry to ask you such a silly question but i am still not able to understand how retained earnings figure would be reduced when we buy an asset (if retained earnings are used as a source of finance) except that the retained earning would be reduced in coming years ( life of an asset) by the depreciation amount.
Sir please help and clear my doubt.
John Moffat says
March 23, 2017 at 1:16 pm
The double entries are completely irrelevant for Paper F9.
As a business makes profits (and therefore retained earnings increase) they will also generate cash (from the sales less the expenses). Obviously year by year the net cash generate will not exactly equal the profit (because of things like depreciation), but if a business trades profitably then they will generate more cash, and this is the most common and the easiest source of finance for buying new assets and growing the company.
February 25, 2017 at 2:03 pm
Great lecture as always! Thanks a lot. I have a query as you see below –
Another simple theory for a person to arrive at a net cash flow effect of Nil on the rights issue is explained below. Let me know your thoughts on this –
In the above example, a person “A” gains 1.5 but pays 6. So, in terms of ratio its 1 : 4.
So, percentage being 100, “A” would have to buy 1/5 x 100 = 20% and sell rights of 4/5 x 100 = 80%.
This can be tried with any random figure, for instance – if a person “B” gains 2 but pays 9, to break even in Cash flows, “B” would have to have to buy 2/11 x 100 = 18.18% and sell 9/11 x 100 = 81.82% of the rights issue at his disposal.
So, as we already have the data at our disposal from the calculations we did previously for value of rights (1.5) and rights issue price already given (6), do you think its valid way to go ahead with applying ratios?
Please let me know your thoughts.
February 25, 2017 at 5:28 pm
Yes it is valid. It doesn’t matter how you find the TERP and how you determine the answer to this problem (as long as you understand what is happening because the examiner tests understanding more than ‘rules’ 🙂 )
March 8, 2017 at 6:15 am
Thanks a lot for your confirmation on this! Have a nice day 🙂
Sorry I didn’t acknowledge sooner. I saw this, while I looked at this lecture for my revision for the exam.
March 8, 2017 at 10:46 am
No problem 🙂
November 15, 2016 at 11:44 am
Thank you Mr. Moffat,
I have a question in regards to the wealth of the Shareholder after the rights issue.
Why wouldn’t the shareholder sell their whole rights issue at the rights share value which in this case is $1.5 and increase the cash balance and in turn increase their overall wealth?
March 23, 2017 at 1:19 pm
You need to watch the lecture again!!
If they sell their rights they will gain cash, but at the same time the value of their existing shares will be lower in total by the same amount.
July 26, 2016 at 3:39 pm
1,5/7,5=20 % must work as well
July 26, 2016 at 4:42 pm
Yes it does!
July 10, 2016 at 4:27 pm
And as always your lectures and explanations are an artwork, thank you from the heart
July 10, 2016 at 8:49 pm
Thank you very much for your comment 🙂
May 21, 2016 at 12:56 am
I would disagree with the statement that algebra is slower than your method
% to take up=value of rights/ex-rights MV
(follows from 6x=(1-x)1.5)
If I need to show on an exam workings for your method i would need to show how I got 80, then how i got 400, then divide 80 on 400. I do appreciate the answer is obvious but an examiner wants to see workings, doesn’t he?
May 21, 2016 at 1:01 am
Sorry, by ‘algebra’ I meant ‘what you called algebra’ as your method is algebra as well 🙂
May 21, 2016 at 9:13 am
In Section A of the exam it is irrelevant how you do your workings because nobody looks at them!
In Section B the examiner is checking more that you understand what is happening, which is why I do it the way I do – simply using a learned ‘rule’ does not really prove understanding. (And the way I do it is certainly not algebra 🙂 )
March 9, 2016 at 12:09 am
When calculating the new wealth, if Mrs X takes half her rights wouldn’t that be:
1.200 shares x $8 = $9.600
200 rights x $6 = $1.200
Giving a total of $10.800 ?
Why are we placing the $7,50 on all the 1.400 shares?
Doesn’t the ex-right m.v of $7,50 apply only on the 600 shares + 200 rights that Mrs X took up? – (i.e 800 x $7,50)
Shouldn’t the rest of the 600 current shares that Mrs X doesn’t take up the rights to stay unaffected? (i.e 600 x $8)
March 9, 2016 at 6:23 am
Always we assume that all the rights are taken up by somebody. If Mrs X only takes up half the rights then the other half are sold and someone else will take them up (that is the only reason that the ‘someone else’ would buy the rights in the first place).
March 10, 2016 at 7:11 pm
Thank you for your quick reply Mr. John! 🙂
March 11, 2016 at 7:17 am
You are welcome 🙂
February 11, 2016 at 9:09 pm
Would I be wrong if I calculate as below
Value of right @1.50/ new right value @7.50
Which gives me 20% in your last example?
February 12, 2016 at 6:41 am
Thats fine – see my reply to the comment below.
August 22, 2015 at 5:46 pm
Dear John, on your question about what % is ideal so that the cash does not get effected, I have seen the explanation and it make all sense, however, I was wondering whether is it not the same if I divide $1.5/$7.5 that is the value of right divided by the Ex.Right M.V. or was this example a mere coincidence?
Thanking in advance.
August 22, 2015 at 6:18 pm
What you have written is true – it’s not a coincidence 🙂
August 27, 2015 at 6:22 am
Dear sir When you calculated new wealth in example 2
1200×1/3=400 but after thats in new wealth why you make again 1/2
you make 1200×1/2×1/3 why 1/2 its must be 1600 not 1400 …we offer more 400 so 1200+400 =1600
then after that we tale half 200 and sale hafl 200
August 27, 2015 at 8:37 am
Although they have the right to buy 400 shares, the only buy half i.e. they buy 200 shares, and they sell the rights to the other 200.
April 16, 2015 at 12:41 pm
thanks John for these wonderful lectures.
Now my issue is this,example 2 in the topic of sources of finance-equity, why do we put a bracket on the “take up rights” when trying to find out the new wealth???
April 16, 2015 at 12:50 pm
Because you have to pay out cash if you take-up the rights.
It does not matter whether you put a bracket or not, so long as you realise that it means having less cash.
April 16, 2015 at 10:54 am
Is this not annoying for shareholders they have to buy 20% then sell the rights of 80% and after doing all this messing around they only break even? Do right issues then not get a bad press? I own shares and have had a few right issue letters but so far have ignored them thus seems Im losing money but if I pay attention to them and take my time and act on these letters then at best I break even. Bit frustrating this am I missing something asI am not a big fan of spending time and effort to break even?
April 16, 2015 at 12:29 pm
First, Mike does not teach F9! 🙂
Rights issues are very popular with shareholders. As I say in the lecture, the actual ex-rights price will usually be higher than the theoretical price (because shareholders usually expect the money raised to be invested well by the company), and therefore it will be better than breakeven – whatever they decide to do.
Ignoring a rights letter will usually mean that the company will sell the rights for you and so you will receive cash, but you will end up owning a lower % of the companies shares. The beauty of rights issues is that you have the choice – pay in cash and own more shares, or take out cash and own less shares (in % terms). What shareholders decide depends much on what cash they have available and how optimistic they are about the companies growth in the future.
PS buying 20% and selling 80% does not involve messing around – shareholders receive a form stating how many new shares they are entitled to. They simply fill in the relevant boxes for how many they want to buy and how many rights they want to sell.
Taking up rights involves much less hassle than buying more shares on the stock exchange.
April 16, 2015 at 1:33 pm
thanks John for your time and indepth answer.
March 15, 2015 at 8:06 am
What is the difference between Bonus issues (Scrip issues) and Scrip Dividends. How does a company decides whether to go for Bonus or Scrip dividends?
As I understand from the notes, in both free shares are issued and no cash inflows results to the company.
March 15, 2015 at 9:10 am
Bonus issues are where shareholders are given free shares.
Scrip dividends are bonus issues except that they are given the free shares instead of a cash dividend (and are usually given the choice as to whether to take cash or shares).
Scrip dividends are popular because they are effectively a way of raising finance in that if shareholders take shares instead of cash dividends then the company is saving cash that they would otherwise have had to distribute.
Bonus issues on their own do not raise any finance and are simply a way of reducing the market value per share on the stock exchange.
October 13, 2014 at 8:42 am
I have just divided 1.5 to 7.5 and got right answer : 20 %. I also checked this way using different figures and answers were same again. I wonder whether I’m on right way or not. Thanks in advance 🙂
October 13, 2014 at 4:43 pm
Certainly 1.5 / 7.5 is 20%, but I am not sure why you are asking me if that is correct. 🙂
May 17, 2015 at 11:41 am
This is what I got John. It seems like it’s an easier way to calculate the percentage required for no cash effect. Dividing the value of rights by the new share price, i.e. 1.5 / 7.5 = 20%
June 3, 2014 at 3:20 pm
The rights issue wont make the the company’s share price to dilute( lower), since after offering rights the value of share falls? It will give loss to the shareholder, aside from theoretical assumptions.
June 3, 2014 at 6:31 pm
The share price will be lower per share, but everyone will have more shares bought at a low price.
In theory shareholders will make no gain no loss.
In practice (as I say in the lecture) the share price will usually be higher than the theoretical share price, and shareholders will make a gain. The reason is that usually they will be expecting that the money raised will be invested well, which will increase the value.
(If shareholders thought that they would make a loss, then nobody would take up the rights!)
April 27, 2014 at 5:45 pm
Wow, in The End, Its just Mind Blowing, Thanks Again for such a Fantastic Lecture I really Enjoyed it specially in the end 😀
April 1, 2014 at 1:34 am
I did (1.5/7.5)x100=20%
April 1, 2014 at 4:44 am
September 12, 2014 at 1:35 pm
using the value of the right divided by ex-rights price.
October 23, 2013 at 3:34 am
my connection with net is good, just in the middle of the course got msg “server not found :rtmpt://r.acca.opentuitioncom.nedtna-cdn.com.80/play . as you can read I sending you this msg, plz clarify what can be done. Thank you
October 23, 2013 at 6:07 am
I think that the problem must be with your internet connection, because the lecture is working fine. I suggest you try again.
November 22, 2013 at 12:23 am
I had a problem with the lectures initially, a friend told me it was due to spyware from other sites. Try downloading spybot (it’s free) and usually protects from spyware that stops lectures working.. It worked with me, and now I am getting ready to write F9, hope I will be ready..
BTW Thanks for the clear and detailed lectures Mr Moffat..
September 24, 2013 at 10:19 pm
Mr John I’ve noticed another way of finding the correct percentage and I’d like to tell me if this is not always the case. . . .
I say, the value right divided by the theoretical value has to give the right percentage and so $1.5/$7.5=0.2 or 20%. Would this not always be the case?
September 25, 2013 at 10:48 am
That’s fine – it will always work that way 🙂
September 14, 2013 at 9:42 am
Dear Mr John,
Perhaps my question is not really important for the exam, yet I’d like to ask it because I am kind of confused.
As I recall from my F4 study, it is not legally allowed to withdraw funds from the Retained Earnings or the share Premium account, these two accounts/or reserves are treated exactly as the share capital account which is not allowed to be reduced but in certain conditions, yet I find here that the retained earnings is used as a source of finance to expand the company. Having said that, could you pls explain how is this possible/allowed to happen? and please correct me if I am wrong on the whole withdrawing funds from the RE account, perhaps I am mistaken on that and it is allowable.
September 14, 2013 at 10:30 am
You are confusing it with the accounting.
The point is that the company is allowed to distribute the whole of their earnings as dividends.
However, most companies do not do this – they distribute part of the earnings and retain the rest.
The reason they retain is to use the cash to buy new assets and expand the company – however since the profits belong to the shareholders, by retaining some it is like borrowing more money from shareholders.
If they pay dividend then the double entry is to credit cash and debit retained earnings.
If they instead buy more assets and expand, the double entry is to credit cash and debit the asset account.
September 14, 2013 at 4:00 pm
Thank you very much Mr John. Understood!
June 2, 2013 at 5:56 am
Great lecturer, you make it seem so simple. Thank you 🙂
May 7, 2013 at 11:16 pm
Sorry, my H is playing up…
May 7, 2013 at 11:11 pm
Would it not be a bit quicker to do tis:
400×20%=80 to buy (320 to sell)
Tat’s what I did anyway and got the same answer…
Thank you for very clear and informative lectures by the way!
April 26, 2013 at 3:56 am
First of all a hefty amount of thanks sir and it seems to be a part of the class when watching the lecture…
April 24, 2013 at 12:09 pm
March 5, 2013 at 9:54 pm
i watched this calculation,and understand,but when i am doing other quetion i cant solve it….my mind just blank….john plz tell me any logic how i prepare this topic…..
January 24, 2013 at 12:26 pm
i dont know hy this video isnt working
says server not found 🙁
January 24, 2013 at 1:17 pm
Only this video?
November 26, 2012 at 11:18 am
THANKS ALL F U who reply.
May Allah Help us in our EXAMS
November 5, 2012 at 2:19 pm
This video, as with others on OT, just goes to prove what I told a friend recently, that going to opentuition for clarity of explanation is a good step to take.
My friend and I both study at a college where the lectures often seem so hard to understand and sometimes just plainly complicated; however once I get to O/Tuition, things become so clear I often wonder if it is the same topic I’d previously found so difficult in class. When you’ve got it, you’ve got it! John Moffat has certainly got it!!.. Thanks Open Tuition..
November 5, 2012 at 7:42 pm
@manonaseriousmission, Thank you 🙂
May 20, 2012 at 10:35 pm
This is really helpful. I never used to understand F9 concepts until I started watching the Opentuition lectures. Thanks a lot everyone who is involved in this selfless gesture.
April 28, 2012 at 4:18 pm
why are rights issue expensive when they a
re retained by existing share holder? Example : when they are retained they are charged at $6 while they are to a new shareholder they are charged at $1.50?
August 10, 2012 at 11:08 am
@lloyd, The $1.50 is the amount that a new shareholder would have to pay for the rights from the old shareholder. They would then have to pay $6 to the company actually take up the rights and get the share 🙂
September 11, 2012 at 5:37 pm
@johnmoffat, SIr …what is a difference between bonds and debentures……
Miss A.. says
November 26, 2012 at 10:20 am
@mohsinjaved, no difference……both are same
April 11, 2012 at 6:00 pm
I am the early member of Opentuition. Now studying at Lsbf. Even Lsbf Interactive Videos Plateform n Ftc books failed to make these concepts. Only OT can make concepts 100% Clear. Thanks to OT
April 11, 2012 at 6:29 pm
@faheem100, it is scary that you have registered on this site in January 2009, and are still doing ACCA 🙂
April 25, 2012 at 3:23 pm
@admin, so whast wrong in that ? 🙂
May 17, 2012 at 12:19 pm
@sul123, i’ve been in acca since 2008.. now THAT’s scary ;)!.. though i took a couple year break for work . so hope that’s justifiable 😀
March 27, 2012 at 3:53 am
How did you get the $ 400 and find 1/2 of it
April 7, 2012 at 3:30 pm
The rights issue of 1 new share for 3 existing ones… you divide 1200 for 3 = 400 and then it is said she takes up half her rights… so 400 (her rights) divided for 2.
Hope it helps.
February 6, 2012 at 12:50 am
This explanation is so good!! Love it!!!
November 26, 2011 at 5:48 am
i cant view this
November 17, 2011 at 11:11 am
F9 is Enjoyable after the attending the online lectures.
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