Stock splits have the following effects on the financial statements:
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A. B. C. D.Explanation
All of the responses represent the effect of stock splits on the financial statements.
Stock splits have certain effects on the financial statements, and the correct answer is B: all of these answers are correct. Let's go through each effect in detail:
Contributed capital and retained earnings are unchanged: A stock split does not affect the total amount of contributed capital or retained earnings. Contributed capital represents the amount of capital raised by issuing shares, while retained earnings are the accumulated profits of the company. A stock split merely changes the number of outstanding shares without altering the overall equity position of the shareholders.
The account title for common stock changes to reflect the change in the par value of stock: Par value is the nominal value assigned to each share of stock when it is originally issued. In a stock split, the par value per share is typically reduced, reflecting the increase in the number of shares. For example, if a company with a par value of $1 per share implements a 2-for-1 stock split, the new par value per share may be adjusted to $0.50. This change in par value is reflected in the account title for common stock on the financial statements.
Disclosures about the stock on the balance sheet are changed to reflect the additional outstanding shares and the revised par value per share: A stock split increases the number of outstanding shares, and this information needs to be disclosed on the balance sheet. The number of shares outstanding is multiplied by the new par value per share to determine the total common stock value. This disclosure ensures that investors and stakeholders are aware of the updated capital structure of the company.
It's important to note that while a stock split has these effects on the financial statements, it does not alter the overall value or market capitalization of the company. The split primarily aims to increase the liquidity of the stock and make it more affordable to investors without affecting the underlying fundamentals of the company.