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Dear Mr. Moffat,
Can you please help me with the correct answer to the question below?
A company has the following extract from a statement of financial position.
20X7 20X6
$’000 $’000
Share capital 2,000 1,000
Share premium 500 –
Loan stock 750 1,000If there had been a bonus issue of 500,000 shares of $1 each during the year, what is the cash flow from financing activities for the year?
A $1,250 inflow
B $750 inflow
C $750 outflow
D $1,250 outflowThe study text answer is B, considering the bonus issue as an outflow. My answer was A without considering the bonus issue as it does not generate funds and definitely not an outflow, but merely a rearrangement of the capital structure.
Does it mean that the company’s future cash generating ability is hindered due to the bonus issue, hence considered an outflow?
As always your assistance is greatly appreciated, sir
The answer is wrong – the correct answer is A.
There is a cash inflow from issue of shares of 1,500, and a cash outflow for the repayment of the loan stock of 250. So a net inflow of 1,250.
The bonus issue is not a cash flow and simply reduces share premium and increases share capital.
Thank you sir. This means the study text sure needs to revise its answer!
Regards
Mathews
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