It's not uncommon for a publicly traded company to initiate a stock split, which divides each share of stock held by a stockholder into multiple shares. For example, if a company has a 2-for-1 stock split, then its shareholders will receive two shares for each share they own; however, the value of each share will be reduced by half. So while they would own twice as many shares after the split, the overall value of their holdings would not change. Companies need to recalculate the balance of the common stock account following a stock split.
1. Identify the beginning balance of common stock. Note the par value and the number of shares. Review the most recent balance sheet before the stock splits. Look at the stockholder equity section, which is where the common stock account appears. In the description, the par value of the stock and the number of shares outstanding should appear.
2. Review terms of stock split. The board of directors makes the decision to split the stock, and can split the stock using any multiple it chooses. The multiple determines how many shares of stock the original share splits into. For example, it can be a 2-for-1 split, which is the most common split, or a 3-for1 split, or a 3-for-2 split. The specific terms of the stock split appear in the notes from the board meeting. Read the notes and determine what multiple the board members decided to use for the split.
3. Adjust the par value of common stock. Divide the original par value by the multiple. This determines the par value of each share following the stock split.
4. Adjust the number of shares of common stock. Multiply the original number of outstanding shares by the multiple. This determines the number of outstanding shares following the stock split.
5. Calculate the total balance of the common stock. Multiply the revised par value by the revised number of outstanding shares. This determines the new balance of common stock.
- The new balance of the common stock account should equal the original balance. Compare the original balance to the new balance. If they match, you calculated the numbers correctly. If they do not match, review your calculations. Recalculate the par value and the number of outstanding shares.
- Companies also perform reverse stock splits. A reverse stock split behaves the opposite of a stock split and reduces the number of shares outstanding.
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