Understanding Issues of Shares and Related Concepts

12 Questions

What is the main purpose of a company issuing new shares?

To raise additional funds

Which type of stock has priority over common stock in distributions and asset liquidations?

Preferred stock

What is the surplus generated when a company sells its shares at a price higher than their par value called?

Share premium

In what situation might a company issue bonus shares?

To reward current shareholders

When does share premium come into play in determining equity reserves?

When the company sells shares above their par value

What happens to forfeited shares within a company?

They are cancelled and retained by the company

What is the purpose of issuing bonus shares?

To increase the number of shares held by existing shareholders

In the context of share forfeiture, what happens when certain conditions specified in the subscription agreement are not met?

The shares are re-issued back into the pool of available shares

Which component of share capital represents the difference between the net proceeds raised and the par value of shares issued?

Share premium account

When bonus shares are issued, from where must they be allocated?

From accumulated general reserve or retained earnings

What is the primary purpose of share capital in a company?

To reflect the collective holding of shareholders in the business

What does share premium account indicate on a company's balance sheet?

The difference between par value and net proceeds raised by issuing shares

Study Notes

Shares—also known as stocks—are units representing ownership stake within a company. As companies grow and expand their operations, they occasionally need to raise additional funds by issuing new shares, either through public offerings or private placements. This article will explore various aspects related to issues of shares such as different types of shares, share premium, bonus shares, share capital, and forfeited shares.

Types of Shares

Companies can issue multiple classes of shares with distinct rights attached to each class. Common stock is the most prevalent form, typically conveying voting rights and offering potential dividend payments based on profits. Preferred stock, however, often provides fixed dividends and may have preference over common stock when it comes to distributions and asset liquidations during dissolution.

When a company sells its shares at a price higher than their par value, it generates a surplus called share premium. Par value refers to a nominal amount assigned per share which, although irrelevant for accounting purposes, serves more as a reference point rather than an actual monetary amount. Share premium represents excess payment above the face value of shares and plays a role in determining equity reserves.

Issue of Bonus Shares

Bonus shares, also known as scrip dividends, occur when companies distribute free shares to existing shareholders, usually proportionate to the number of shares held. Companies may decide to initiate this process if they want to reward loyal investors without using cash or seeking external funding. However, bonus shares must be issued out of the company's retained earnings, accumulated general reserve, or legal reserves beyond paid-up share capital.

Forfeiture of Shares

Share forfeiture happens when certain conditions specified in the subscription agreement or other terms governing the issue of shares aren't met by allottee(s)—people who purchase or receive shares from the original shareholder. In these cases, the shares are re-issued back into the pool of available shares, allowing them to be sold again or used in future share distribution schemes.

Share capital, sometimes referred to as equity, reflects the collective holding of shareholders in the business. It consists primarily of three components: paid-up share capital, share premium account, and accumulated losses. Paid-up share capital is the aggregate of amounts already received by the company upon issuance of shares, while share premium account is the balance sheet entry reflecting any difference between the net proceeds raised and the par value of shares issued. Accumulated losses represent unrealized losses experienced since the incorporation of the company.

Understanding issues of shares and associated concepts like those mentioned above is crucial for shareholders, corporate executives, investment analysts, regulators, and others interested in the dynamics of businesses and financial markets. By grasping these fundamentals, individuals and organizations gain insights into how corporations manage equity financing and allocate resources among stakeholders, thereby enabling informed decision making and strategic planning.