Question

Why would a company split its stock? What is the impact of a 2 for 1 split on the number of shares of stock issued, the number of shares outstanding, and the par value per share? What is the journal entry required to record a stock split?

Answer 1

A stock split is a decision by a company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.

The primary motive of a stock split is to make shares seem more affordable to small investors.

Although the number of outstanding shares increases and the price per share decreases, the market capitalization (and the value of the company) does not change.

The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares, respectively, for every share held earlier.

Reverse stock splits are when a company divides, instead of multiplies, the number of shares that stockholders own.