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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 1,000
If 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 answer is B
Issue of share capital for cash (2,000 + 500 – 1,000 – 500 bonus)) 1,000
Repayment of loan stock (1,000 – 750) (250)
Net cash inflow 750I cannot fully understand a bonus issue part. I think increase from 1000 to 2000 includes bonus issue so we should exclude it. Only 500 000 will cause cash flows. So 500+500(share premium)-250(loan stock)=750. But there is no share premium in 20X6 and there is no extra information about that. So Can we consider that bonus issue is financed from retained earnings?
Where did you find this question?
The reason I ask it that assuming you have copied the whole of the question correctly then it is impossible to answer.
The reason is that there has obviously been a share issue for cash during the year (because the share capital went up by 1,000 and the bonus issue was 500).
What could have happened is that the new issue for cash came first and was 500 shares at $3 per share. So share capital would go up by 500 and share premium would go up by 1,000. Then they had the bonus issue of 500 shares, so share capital would go up by $500 and share premium would go down by $500.
In that case, the cash inflow will have been $1,500.If the bonus issue came first, then the bonus issue will have come out of retained earnings, and so then the new issue will only have raised $1,000.
However, unless there was more information in the question than you have typed, it is not a valid question to be asked in the exam.
It is in BPP study text in quick quiz.The text is for exams from 1 September 2016
to 31 August 2017.
there is not more information. At first I also thought A answer 1500-250=1250. And now I definitely think that A is correct, because if a bonus issue was from retained earning they would tell us.
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