Distinguish between Stock splits and stock dividends.

CPA-Financial-Management-Section-3 Revision kit

Stock split
– Involves splitting or breaking down a stock into specified number of shares but
without increasing the nominal or par value of capital hence the par value of a stock has to be reduced by the split factor. Example:
1 stock @ Sh 50 par value = 5 shares of Sh 10. in this case, the split factor is 5. Similarly, 1 stock @ Sh 100 par value = 8 shares of Sh 12.50.

Stock dividends
– This is also called bonus issue and involves issue of free shares to existing shareholders on prorate basis
– The shares issued are valued at par value and are paid from retained earnings hence bonus issue is simply a conversion of retained earnings to ordinary share capital.

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