Effects of Stock Splits on Financial Statements

D

The shareholder's percentage interest in the corporation is unchanged.

Stock splits are corporate actions where a company increases the number of its outstanding shares by dividing each existing share into multiple shares. The purpose of a stock split is to reduce the price per share, making the stock more affordable for investors. Stock splits do not directly impact the underlying value of the company, but they can have several effects on the financial statements. Let's go through each answer choice and analyze its accuracy:

A. The account title for common stock changes to reflect the change in the par value of stock: This statement is true. When a stock split occurs, the par value of the stock usually changes. Par value represents the nominal or face value assigned to each share by the company. After a stock split, the par value per share decreases proportionally. Therefore, the account title for common stock may change to reflect this revised par value.

B. Contributed capital and retained earnings are unchanged: This statement is true. A stock split does not affect the contributed capital and retained earnings accounts. Contributed capital represents the amount of capital raised from shareholders through the issuance of stock, and retained earnings represent the accumulated profits of the company. Both these accounts remain unaffected by a stock split.

C. Disclosures about the stock on the balance sheet are changed to reflect the additional outstanding shares and the revised par value per share: This statement is true. Following a stock split, the number of outstanding shares increases, and the par value per share decreases. Therefore, the balance sheet should be updated to reflect the revised number of shares and the new par value per share. This ensures accurate presentation of the company's capital structure and equity.

D. The shareholder's percentage interest in the corporation is changed by the percentage change in the market value of the stock: This statement is false. A stock split does not change the percentage interest of shareholders in the corporation. Although the number of shares held by each shareholder increases, the overall ownership percentage remains the same. This is because the stock split does not affect the underlying value of the company or the proportional ownership rights of shareholders.

In summary, the correct answer is D. The shareholder's percentage interest in the corporation is not changed by the percentage change in the market value of the stock. All other options (A, B, and C) correctly describe the effects of stock splits on the financial statements.