Multiple Choice
Which of the following is the most common means of managing risk in accounting?
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1. Introduction to Accounting
Types of Accounting
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Which of the following statements about a stock split is correct?
A
A stock split increases total stockholders' equity.
B
A stock split increases the par value per share.
C
A stock split decreases total stockholders' equity.
D
A stock split does not affect total stockholders' equity.
Verified step by step guidance1
Understand the concept of a stock split: A stock split is a corporate action where a company divides its existing shares into multiple shares to boost the liquidity of the stock. It does not change the total value of the company or the total stockholders' equity.
Analyze the impact on par value per share: In a stock split, the par value per share is reduced proportionally to the split ratio. For example, in a 2-for-1 split, the par value per share is halved.
Examine the effect on the number of shares: A stock split increases the number of shares outstanding proportionally to the split ratio. For instance, in a 2-for-1 split, the number of shares doubles.
Evaluate the impact on total stockholders' equity: Total stockholders' equity remains unchanged because the split does not involve issuing new equity or changing the company's net assets.
Conclude the correct statement: Based on the analysis, the correct answer is that a stock split does not affect total stockholders' equity.
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