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Sir please explain this to me, in a ques we’re considering financing options and reconstructing the SOFPs: the following extract is ques+ part of the answer:
The existing SOFP is given like
Assets less current liabilities 150
less: (-) Debt (70)
———–
80Share capital 20
Reserves 60
———-
80After rights issue:
Assets less current liabilities (150+new cap 25+retained earnings) 180.25
less: (-) Debt (70)
———–
110.25Share capital 25
Reserves 85.25
———-
110.25* The rights issue raises $25m, of which $5m is represented in the statement of financial position by share capital and the remaining $20m by share premium. The reserves are therefore the current amount ($60m) plus the share premium of $20m plus accumulated profits of $5.25m
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What I don’t understand is why are we adding retained earnings to assets to balance these two?The total equity is the share capital + reserves.
The total was 80, and will increase by the amount raised by the rights issue (25) and the profit for the year (5.25) so will increase to 110.25.
Without seeing the entire question, I don’t know whether it gave the profit for the year or not.
However you should remember from Paper FA (was F3) that the long-term capital (equity + debt) must always be equal to the net assets.Oh, I think I do get it……………. I was just trying to equate the two in a single accounting equation .. Nevermind.. I get it now thank you Sir for taking out time to help me clear this
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