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Class Discussion 2014

Day 13
Change in Capital
Increase in capital
o Issue of shares to public
o Rights Issue
o Stock Dividend
Decrease in capital (Capital Reduction)
o CR through Buy back of Shares

Buy back of shares


What
o Process of Capital Reduction wherein the company purchases
shares from the SHolders
o The process is regulated by SEBI and the Companies Act
Why
o Means to manage the EPS, BV per shares and Price per
shares
o Means to manage the promoters stake
How
o BB has to follows SEBI Regulation or Provisions of the
Companies
o A company that plans for BB has to following conditions:
Presence of Free Reserve
Debt Equity Ratio (LTD/Equity) not to exceed 2:1 post
BB
BB shares to be destroyed
o Accounting Condition
Transfer an amount equal to the FV of the shares BB
from Reserves to a new account called CAPITAL
REDEMPTION RESERVE

Class Discussion 2014


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Class Discussion 2014


Day 12
Recap
Asset Accounting and Financial Statements
Inventory (AS-2)
CFS( AS-3)
PPE( AS-6,10, 28)
Investment (later)
Financing Decisions and Financial Statements
Equity
o Capital
o Reserves
Retained Profits
Liabilities
o Current Liabilites
o Non Current Liabilities
Question for discussion
Why is it necessary to understand the FD?
o FD affects the following
Risk
Risk as reflected by credit rating or grading
Cost of total capital
Cost as reflected by Weighted Average cost of
Capital (WaCC)
WaCC depends on
o Kd
o Ke
o Capital Structure: DER
o Generally: Ke>Kd
Performance: Profitability
As reflected by ROI

Class Discussion 2014

Accounting for Share Capital

Money raised by issuing shares


Share
o Ownership document
o Is a financial instrument which gives the holder
Right to vote
Right to participate in the distribution of profit
Right to receive shares in case of subsequent
issue of shares (RIGHT SHARES)
Types of shares
o Equity Shares
Shares other than PS
Residual owners
Common shares or ordinary Shares
o Preference Shares
Shares which gives the preference to the
holders over the equity shares with respect to
the following
Return on investment
Return of Capital

Class Discussion 2014


Accounting for equity shares
Value
o Face value
Value written on the face of the instrument
Capital is always shown at the FV
Dividend is always calculated on the FV
o Issue price
Price at which the shares are issued to the public
IP = FV : Issue at Par
IP> FV: Issue at Premium
o Excess of IP over the FV is called
Share premium
IP<FV: Issue at Discount
o Market value
Price at which the shares are traded in the
secondary market (Stock exchanges)
o Book value
o Fair Value

Class Discussion 2014


Distribution of profit
o Dividend
Is not an expense, appropriation of profit
o Dividend can be distributed as follows
Cash dividend
Reduction of cash
Retained profit will reduce
Equity will reduce
BV per share
Stock Dividend
If the dividend is distributed in the form of
shares. (BONUS SHARES)
No change in cash
Capital increase
Retained profit will reduce
Equity: no change
No of shares will increase
BV per share will fall

Buy back of shares

Class Discussion 2014


i
Interrelationship between Financial Statements
1. Capital
Opening
Add
Issue of shares
To raise capital
To distribute dividend(Bonus shares)
To reduce liability
To acquire Assets
PPE
Stock of goods
Investments
Less
BB of shares
Closing
2. Reserves (Retained Profit)
Opening
Add
Pat
Less
Dividend
Closing

Class Discussion 2014


3. Loans
Opening
Add
New loans
Less
Payments
Conversion
closing
4. PPE
Opening
Add
Purchase
Add Revaluation
Less
Depreciatio
Impairment
Sales
Closing
5. Creditors
Opening
Add
Pruchase
Less paymebt
Discount
Purchase returns
Closing

Class Discussion 2014

6. Stock
Opening
Add
Purcahse
Less
COGS
Change in the market price
Closing
7. Debtors
Opening
Add
Sales
Less
Collection
Bad dedts
Sales returns
Closing
8. Investments
Opening
Add
Purchase
Less
Sales
Plus minus change in the market value
Closing