Bonus Issues Capitalize Reserves Without New Funds

Steps:

• Evaluate statement 1: A bonus issue transfers reserves to share capital, generating no new cash inflows for the company.
• Evaluate statement 2: No cash is exchanged in a bonus issue, so the company's current assets and liabilities remain unchanged, preserving liquidity ratios.
• Evaluate statement 3: Bonus shares are identical to existing ordinary shares, granting shareholders full ownership rights, including the ability to sell them on the market.
• Select option combining correct statements 2 and 3.

Why C is correct:

• A bonus issue is defined as a free distribution of shares from retained earnings or reserves, maintaining liquidity (no cash impact) while allowing sale of new shares per stock exchange rules.

Why the others are wrong:

• A includes incorrect statement 1, as no funds are raised.
• B relies solely on false statement 1.
• D omits valid statement 2 on liquidity.

Final answer: C