A stock split is an accounting event where a company increases the number of its outstanding shares by dividing each existing share into multiple shares. For example, in a 2-for-1 split, each shareholder receives two shares for every one they previously owned, and the share price is halved. The fundamental principle is that the total market value of the company remains the same, and the value of each individual share decreases proportionally.
The correct answer is No change in total equity. A stock split is merely a reclassification within the shareholders' equity section of the balance sheet. While the number of shares increases and the par value per share decreases, the total dollar amount of common stock, and consequently the total shareholders' equity, remains unchanged. It's akin to exchanging a $10 bill for two $5 bills; the total value is identical.
- Increases retained earnings is incorrect because retained earnings, representing accumulated profits, are unaffected by a stock split.
- Decreases total equity is incorrect as the overall value of the equity remains constant; only its composition changes.
- Increases share capital is incorrect because although the number of shares rises, the par value per share drops proportionally, ensuring that the total share capital (number of shares multiplied by par value) stays the same.