Definition of Scrip
In the realm of finance and accounting, ‘Scrip’ is a term that signifies a certificate or document which verifies the ownership of financial instruments such as stocks, shares, or bonds. These certificates are also often issued in place of dividends or interest payments. Additionally, a scrip can represent the documentation issued when a corporation distributes additional shares to its existing shareholders, which is known as a scrip issue. Scrip issues are usually done to capitalize the firm’s reserves.
Examples
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Scrip Issue: A corporation may decide to issue additional shares to its existing shareholders as bonus shares without requiring additional investment. This is commonly done out of the company’s reserves and avoids the depletion of its immediate cash flow.
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Dividend Scrip: A company may issue certificates instead of cash dividends, which can be redeemed for shares at a later date. This method allows the company to retain cash while still rewarding shareholders.
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Promissory Scrip: When a company cannot immediately pay dividends in cash, it may issue scrip as a promissory note, which states that the payment will be made in the future.
Frequently Asked Questions (FAQs)
What is the purpose of a scrip issue?
A scrip issue aims to increase the number of shares held by existing shareholders without needing them to invest more money. This is often used to capitalize on company’s reserves or profits, providing liquidity without depleting cash reserves.
How does a scrip dividend work?
A scrip dividend allows shareholders to receive additional shares instead of a cash dividend. This option enables companies to conserve cash while still distributing profits to shareholders.
Is there any financial benefit in receiving a scrip?
Receiving scrip instead of cash dividends may offer tax benefits in some jurisdictions and it provides shareholders with the opportunity to increase their holdings without any investment.
What is a scrip certificate?
A scrip certificate is a document issued instead of a dividend payment. It acts as a promise that the holder can receive shares of stock or cash at a later date or specified event.
Do scrip issues dilute share value?
Yes, scrip issues can potentially dilute share value since they increase the number of shares outstanding without increasing the actual value of the company. However, they do provide liquidity and may improve marketability and ownership percentage if targeted correctly.
- Stock Certificate: A document that serves as proof of stock ownership.
- Dividend: The distribution of a portion of a company’s earnings to shareholders.
- Bond: A fixed income instrument issued by governments or companies to raise capital.
- Share: A unit of ownership interest in a corporation or financial asset.
- Bonus Shares: Additional shares given to current shareholders at no cost based on the number of shares already owned, also known as a scrip issue.
- Capitalization: The conversion of reserves or profits into capital.
Online Resources
Suggested Books for Further Studies
- “Financial Accounting” by Thomas R. Dyckman and Michelle Hanlon
- “Intermediate Accounting” by Kieso, Weygandt, and Warfield
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Accounting: What the Numbers Mean” by David Marshall, Wayne McManus, and Daniel Viele
Accounting Basics: “Scrip” Fundamentals Quiz
### What does a scrip certificate primarily represent?
- [ ] A liability owed by a company
- [ ] A fixed deposit receipt
- [x] Ownership of stocks, shares, or bonds
- [ ] A company's annual revenue document
> **Explanation:** A scrip certificate primarily serves as evidence of ownership of financial instruments such as stocks, shares, or bonds.
### What is a scrip issue?
- [x] Issuance of additional shares to existing shareholders
- [ ] Issuance of bonds to new investors
- [ ] Payment of cash dividends to shareholders
- [ ] Repurchase of shares by the company
> **Explanation:** A scrip issue is when a corporation distributes additional shares to its existing shareholders, typically from its reserves.
### How does a scrip dividend benefit a company?
- [ ] It increases immediate cash outflow.
- [x] It conserves cash while rewarding shareholders.
- [ ] It reduces the number of shares outstanding.
- [ ] It increases the company's liabilities.
> **Explanation:** A scrip dividend allows companies to conserve cash while distributing profits to shareholders by issuing additional shares instead of cash.
### In which scenario might a company issue promissory scrip?
- [ ] When it has abundant cash reserves.
- [ ] To recruit new employees.
- [ ] When it cannot pay dividends in cash.
- [x] When it cannot pay dividends in cash.
> **Explanation:** A company might issue promissory scrip as a promise to pay shareholders in the future if it cannot immediately pay dividends in cash.
### Do scrip issues always increase the market value of a company's shares?
- [ ] Yes, they always increase market value.
- [ ] No, they decrease market value.
- [x] No, they typically dilute share value.
- [ ] Yes, they make the company's shares rare and precious.
> **Explanation:** Scrip issues can potentially dilute share value since they increase the number of shares outstanding without increasing the actual value of the company.
### What is a bonus share related to scrip?
- [ ] A cash payment given to shareholders.
- [ ] A type of bond issued to investors.
- [x] Additional shares given to current shareholders at no cost.
- [ ] A discount on future shares purchase.
> **Explanation:** Bonus shares are additional shares given to current shareholders at no cost based on the number of shares they already hold, this is part of a scrip issue.
### What happens to a company's reserves after a scrip issue?
- [ ] Reserves are depleted.
- [x] Reserves are capitalized.
- [ ] Reserves remain untouched.
- [ ] Reserves are converted to debt.
> **Explanation:** After a scrip issue, a company's reserves are typically capitalized, converting reserves into share capital through the issuance of additional shares.
### Can a scrip certificate be redeemed at a later date or specified event?
- [x] Yes, scrip can often be redeemed later.
- [ ] No, once issued it cannot be redeemed.
- [ ] Only when a company decides, unconditionally.
- [ ] Only through secondary markets.
> **Explanation:** A scrip certificate acts as a promise that the holder can receive shares of stock or cash at a later specified date or event.
### Why might shareholders prefer scrip dividends over cash dividends?
- [ ] They immediately increase cash flow.
- [ ] They are guaranteed higher returns.
- [x] They can offer tax benefits and increase holdings.
- [ ] They simplify bookkeeping.
> **Explanation:** Shareholders might prefer scrip dividends as they can offer tax benefits in some jurisdictions and provide the opportunity to increase holdings without additional investment.
### When capitalizing a firm's reserves using a scrip issue, what impact does this have?
- [ ] It reduces the number of shares available.
- [ ] It increases the company's debt.
- [x] It converts reserves into share capital.
- [ ] It decreases the company's market share value.
> **Explanation:** Capitalizing a firm's reserves using a scrip issue involves converting reserves into share capital by issuing additional shares to shareholders.
Thank you for exploring the concept of “Scrip” with us. We hope this detailed breakdown and quiz have enhanced your understanding of this important accounting term. Keep learning and growing your financial acumen!
