Question

Increase in share premium is

• A. Source of fund
• B. Application of fund
• C. No flow of fund
• D. None of these

Hint:

In Fund Flow analysis, think about the effect on working capital. Any inflow of funds from long-term sources (like issuing shares or debentures) or from operations is a 'Source'. Any outflow for long-term purposes (like buying fixed assets or repaying long-term loans) is an 'Application'.

Answer 1

The Correct Option is A

Step 1: Understanding the Question:
The question asks how an increase in the Share Premium account is treated in a Fund Flow Statement.
Step 2: Key Concept:
A Fund Flow Statement analyzes the sources and applications (uses) of funds between two balance sheet dates. A 'source' of funds is any transaction that increases the net working capital. An 'application' is any transaction that decreases the net working capital.
Share Premium (also known as Securities Premium) is the amount received by a company over and above the face value of its shares.
Step 3: Detailed Explanation:
When a company issues shares at a premium, it receives cash. For example, if a share with a face value of \$10 is issued for \$15, the company receives \$15 in cash. Of this, \$10 goes to the Share Capital account, and \$5 goes to the Share Premium account.
The journal entry is:
Bank A/c Dr. \$15
\indent To Share Capital A/c \$10
\indent To Share Premium A/c \$5
This transaction increases the company's cash (a current asset) and thereby increases its working capital. Any transaction that brings funds into the business and increases working capital is treated as a source of fund. An increase in the share premium account signifies that the company has received cash from the issue of shares above their par value.
Step 4: Final Answer:
An increase in share premium represents a cash inflow to the business, making it a source of fund. Therefore, (A) is the correct answer.