Bonus shares reclassify reserves as share capital Steps:

• Bonus shares are additional shares issued to existing shareholders from accumulated reserves, not involving cash.
• Accounting entry: Debit reserves (e.g., retained earnings) and credit share capital by the same amount.
• This transfers value from reserves to share capital without changing total equity.
• Result: Reserves decrease, while overall financial position remains neutral.

Why D is correct:

• Issuing bonus shares directly reduces reserves by converting them into share capital, per standard accounting principles (e.g., IAS 33 on earnings per share).

Why the others are wrong:

• A: No cash is distributed, so liquidity (current assets vs. liabilities) stays unchanged.
• B: Profitability ratios like net profit margin are unaffected, as no new profits are generated.
• C: Gearing (debt/equity) remains the same, since total equity is unaltered—only its composition changes.

Final answer: D