Question

If debentures are converted into equity shares, it is a/an :

• A. Inflow of cash
• B. Cash and Cash equivalents
• C. Outflow of cash
• D. No flow of cash

Answer 1

The Correct Option is D

Step 1: Analyze the Transaction

When debentures are converted into equity shares, it’s a non-cash transaction. The company doesn’t receive or pay any cash. Instead, it’s an accounting adjustment:

• The debenture liability is removed from the balance sheet.
• The equity share capital increases by the value of the shares issued.

Step 2: Determine the Cash Flow Impact

Since no cash changes hands during the conversion:

• It’s not an inflow of cash (no cash is received).
• It’s not an outflow of cash (no cash is paid out).
• Cash and cash equivalents (like bank balances) are unaffected because there’s no cash movement.
• This is a no flow of cash transaction, as it’s just a book entry adjusting liabilities and equity.

Step 3: Accounting Perspective

In accounting:

• The balance sheet shows a decrease in debentures (liabilities) and an increase in share capital (equity).
• This transaction doesn’t appear in the cash flow statement because it’s a non-cash financing activity.
• It may be disclosed in the notes to the financial statements as a significant non-cash transaction.

Evaluate the Options

Let’s check the options:

• Option 1: Inflow of Cash: Incorrect, as no cash is received.
• Option 2: Cash and Cash Equivalents: Incorrect, as cash and cash equivalents are not impacted (no change in cash occurs).
• Option 3: Outflow of Cash: Incorrect, as no cash is paid out.
• Option 4: No Flow of Cash: Correct, as this is a non-cash transaction.

Final Answer

If debentures are converted into equity shares, it is a No Flow of Cash transaction, which matches Option 4.