Redemption of preference Shares is concerned directly with ______a)Investing Activitiesb)Not concerned with any activityc)Financing Activitiesd)Operating ActivitiesCorrect answer is option 'C'. Can you explain this answer?

Question

Answer

When shares debentures are issued or redeemed they are classified under financing activity

Answer

It is considered Financing Activity!! So What is the reason? .
It is simply directly related to the purpose of issue of Shares or debenture, as we know that company Issues it's shares or debenture to get some sources of money i.e finance, that is why they are considered as Long term Liabilities,so as per this reason if company repay it's liability (here, Shares or debentures, which are the source of finance) will also be (of course) a financing activity.

Answer

Redemption of preference shares is concerned directly with Financing Activities.

Explanation:
Financing activities are activities that involve raising capital or funding for a company. They typically involve transactions between a company and its investors, creditors, or lenders. These activities affect the company's capital structure and include activities such as issuing and redeeming shares, borrowing or repaying loans, and paying dividends.

Preference shares are a type of equity instrument that gives the shareholders preferential rights over common shareholders, such as a fixed dividend payment or priority in case of liquidation. When a company decides to redeem its preference shares, it means that it is repurchasing or buying back these shares from the shareholders.

Here's why redemption of preference shares is considered a financing activity:

1. Repurchasing shares: Redemption of preference shares involves the company repurchasing its own shares from the shareholders. This repurchase is a financial transaction that affects the company's capital structure. It reduces the company's equity and may result in a decrease in the number of outstanding shares.

2. Cash outflow: Redemption of preference shares typically involves a cash outflow from the company. The company needs to have sufficient funds to repurchase the shares from the shareholders at the agreed-upon redemption price. The cash used for the redemption is considered a financing activity as it affects the company's cash flow.

3. Impact on capital structure: Redemption of preference shares affects the company's capital structure by reducing the equity portion. It may result in a decrease in the company's total equity and a change in the proportion of debt and equity in the capital structure. This change in the capital structure is an important aspect of financing activities.

4. Disclosure in financial statements: The redemption of preference shares is typically disclosed in the financial statements under the financing activities section. This section provides information about the company's activities related to raising and repaying funds, including share issuances and repayments.

In conclusion, redemption of preference shares is considered a financing activity as it involves repurchasing shares, cash outflow, impact on capital structure, and is disclosed in the financial statements under financing activities.

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