Question

Identify and explain the difference between a stock dividend and a stock split.  Discuss the primary purpose of a stock split and the affect it has on Retained Earnings.

Answer 1

To explain the difference between stock dividend and stock split, let us first know the meaning of both of them.

Stock Dividend: It is a type of dividend given by the company under which the shareholders as on the record date get the plus in there number of shares as dividend because unlike cash dividend, shares are given to the shareholders under stock dividend.

Stock Split: It refers to the practice of the company to break the shares . For eg. five for three stock split means every shareholder having three shares will get five shares after stock split.It is done so that the investors can buy more shares as the stock prices declines after stock split.

The primary purpose of Stock split is to bring a decline in the price of the share and make it feasible to the prospective investors.