A stock split differs from a stock dividend in that a stock split:

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Accepted Answer

Decreases the par value per share while increasing the number of shares. A stock split increases the number of shares outstanding while proportionally decreasing the par value per share, with no effect on any account balances. For example, a 2-for-1 split doubles the number of shares and halves the par value. Total stockholders' equity, retained earnings, and all equity account balances remain exactly the same. A stock dividend, by contrast, transfers an amount from retained earnings to paid-in capital accounts.

Stock splits do not increase retained earnings or total equity (the first option)  -  no account values change. The third option describes a stock dividend, not a stock split: a stock dividend debits Retained Earnings and credits Common Stock and Additional Paid-In Capital. Neither stock splits nor stock dividends involve cash payments to shareholders (the fourth option)  -  that describes a cash dividend.

The distinction between stock splits and stock dividends is frequently tested on the CLEP exam. In a stock dividend, the company issues new shares and capitalizes a portion of retained earnings (for small dividends, at market value; for large dividends, at par value). In a stock split, only the number of shares and par value change  -  it is essentially a cosmetic change. Both increase the number of shares outstanding without changing the total value of equity, meaning each share becomes proportionally less valuable. Companies use stock splits to make their stock price more affordable to retail investors.

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