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Issue of fully paid bonus share is outflow or inflow for a company?
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Issue of fully paid bonus share is outflow or inflow for a company?
Issue of Fully Paid Bonus Share: Outflow or Inflow for a Company?
When a company issues fully paid bonus shares to its shareholders, it affects the cash flow of the company. In this article, we will discuss whether the issue of fully paid bonus shares is an outflow or an inflow for a company.
Definition of Fully Paid Bonus Shares
A fully paid bonus share is a free share of stock given to existing shareholders in proportion to their current holdings. The bonus shares are issued by a company to reward its shareholders, and it does not require any payment from the shareholders. The bonus shares are fully paid, which means that the company has already paid for them.
Is Issue of Fully Paid Bonus Shares an Outflow or Inflow?
The issue of fully paid bonus shares is not an outflow or inflow for a company. This is because the company is not receiving any cash inflow or outflow when it issues fully paid bonus shares. Instead, the company is transferring a portion of its reserves to the shareholders in the form of bonus shares. The reserves of the company are reduced, and the number of outstanding shares increases. The value of each share is reduced, but the total value of the company remains the same.
Impact of Fully Paid Bonus Shares on Company's Financial Statements
The issue of fully paid bonus shares affects the financial statements of a company in the following ways:
- The reserves of the company are reduced, and the retained earnings account is debited.
- The number of outstanding shares increases, and the share capital account is credited.
- The earnings per share (EPS) of the company decrease, as the net income is distributed over a larger number of shares.
- The dividend per share (DPS) of the company decreases, as the dividend is distributed over a larger number of shares.
- The market price per share (MPS) of the company may decrease, as the supply of shares increases.
Conclusion
To sum up, the issue of fully paid bonus shares is neither an outflow nor an inflow for a company. It is a transfer of reserves to the shareholders in the form of bonus shares. The issue of fully paid bonus shares reduces the reserves of the company, increases the number of outstanding shares, and affects the financial statements of the company in various ways.
Community Answer
Issue of fully paid bonus share is outflow or inflow for a company?
Fully paid shares are shares issued for which no more money is required to be paid to the company by shareholders on the value of the shares.
Why Bonus shares are issued---
As an alternative to cash dividends, companies at times give away free shares to their shareholders when they are short of cash and don't want to upset shareholders that expect a regular income.
Bonus shares are also issued to restructure company reserves. ISSUING BONUS SHARES DOES NOT INVOLVE CASH-FLOW.
Treatment of fully paid bonus shares in Cash flow statement--
case I: If the Net profit(i.e. before appropriations) has been taken in cash from operating activities, then no treatment of bonus.
Case II: If the amount of P&L is taken from B/s(i.e. difference of opening and closing P&L/ reserves), then the mount of bonus issued shall be added back while computing Cash flow from operating activities.
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Issue of fully paid bonus share is outflow or inflow for a company?
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Issue of fully paid bonus share is outflow or inflow for a company? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Issue of fully paid bonus share is outflow or inflow for a company? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Issue of fully paid bonus share is outflow or inflow for a company?.
Issue of fully paid bonus share is outflow or inflow for a company? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Issue of fully paid bonus share is outflow or inflow for a company? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Issue of fully paid bonus share is outflow or inflow for a company?.
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