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Stock split and stock dividend

Transaction Outstanding Shares Par per Share Prior to Stock Split or Stock Dividend 15% Stock Dividend 4-3 Stock Split
Initial Issue 1,200,000 $40 $48,000,000
15% Stock Dividend 1,380,000 $40 $55,200,000
4-3 Stock Split 1,600,000 $30 $48,000,000

The stock dividend is directly proportional spread of extra shares for a given company's common stock. A stock dividend has no effect on a stock owner's proportionate ownership, and likewise has no effect on a stock owner's assets and liabilities, or equity of the company in question. The stock dividend of 15% amounts to a 15% increase in the amount of owned outstanding shared, which in this case is 1,380,000 outstanding shares. The value of the stock remains unchanged.

The stock split presents a shift in the number of outstanding shares, with an additional offset change in the value per share. With an increase in the amount of outstanding shares, the stock split will cause a reduction in EPS. The increase in the amount of outstanding shares due to the 4-3 stock split amounts to 1,600,000 (1,200,000?(4/3)), with a corresponding decrease in the value per share of $30 (= 40?(3/4)). The value of the stock remains unchanged, and as such the value of the outstanding shares in this case is both $48,000,000 before the split and after.

Equity Return

The clearest reason for this large ratio difference is due to the difference of the obligations pending that the company is required to pay. If we assume the formula -

Then we are able to work out the liability balance, because the equity of the stock owners is equal to the liabilities. For the situation of Badwin, this equation can be used to work out -

Rearranging to find x will give us an answer of $5 million in liabilities. For the situation of Hudson, the liabilities are a good deal less, ($990,990), which will result in a reduction of ROE. This example presents the fact that having a larger ROE will not necessarily mean that the company in question is doing better financially. Having said this, these formulas are based on assumptions, and in reality the actual number will depend on many other factors, including the length of the project (the ROE overstatement increases with project length), the capitalization policy, the rate of growth of new investments, the depreciation rate, and the lag between investment and recoupment. ROE is additionally quite sensitive to leverage.


The following businesses and organizations in the accounting field act upon their powers to monitor and regulate the financial situation and activity of the commercial community.

The SEC (Securities and Exchange Commission) has the power provided by Congress to set up, monitor and enforce the standards of accounting for firms in their jurisdiction.

The necessary requirements for financial filing and reporting of the SEC are listed below:

  • Regulation S-X (original and comprehensive forms)
  • ASRs (amendments to the previous)
  • Special releases (relate to current issues when they occur)
  • AAERs
  • SABs
  • ARRs

The organizations responsible for the administration and preservation of accounting standards are firstly the FAF, which includes 16 trustees, and selects the members of FASB. These organizations are followed by the FASB and GASB, with the former being the most influential for regulations, which are followed by GASAC and FASAC.

The separation of powers, like the judiciary, legislative, and executive branches of the US government is important to ensure fair practices, and in a similar way the government should not be allowed to have too much power over the regulation of financial standards. There are also practical benefits. For example, the prosperity of public financial enterprise is a result of the professional mentality of businessmen, who will have the right amount of expertise resulting from day-to-day practice. On the other hand, government authorities might not have this level of expertise and insight when making new amendments and forming new regulations and practice. Under the present system there is an adequate amount of government power to help address illegal or unethical accounting practice, although it is apparent that there are still flaws present in the system, which do not recognize some very significant accounting problems that could have an effect on individual organizations, and even the entire business environment. An example of this is income management practice, and off-balance accounting.