 Hello and welcome to this session in which we'll discuss the idea of stock split. What is the big idea of stock split? Well, it's when the company divides the number of its outstanding shares by some multiple. For example, they could have two for one. What is two for one? It means if you have one share, we're going to give you, we're going to replace it by two shares. Wow, you give me more shares. Is this better? Well, the stock price will be adjusted, but you have more shares. Or for example, Apple in 2020, they did for each share, they gave you four shares. Again, what they do if they gave you four shares, they will divide the stock price by four as well. So if the stock price was $80, now the stock price is $20. If you had 100 shares, if you had 100, let's assume prior to the split, you had 100 shares of Apple and the price was $80. Now you have total value of $8,000. Well, after the split, you have rather than 100 shares. Now you're going to have 400 shares, 400 shares, but the stock price now is $20. So you still have your total value, $8,000. Think of a stock split like this. Let's take a look at this pizza pie. This pizza pie has eight slices. If I told you I'm going to go ahead and break this pizza pie rather than eight, I'm going to give it to you, but I'm going to give you 16 slices by breaking each slice into an additional slice, you'll have the same pizza pie. So the point is the stock split does not really change the value of something. It just changed the structure of it. So if I break this pizza pie into rather than eight, and I break each slice into two additional slices, and this is what my son have at schools. They break each regular slice into two slices. So my son says I ate four slices. He really basically ate two regular slices, but for him it's four slices. The point is it's the same pizza pie and I can break the 16 into 32, or I can do the opposite. I can take this eight slices and break it down into only four pieces. This is called the reverse split. We'll talk about this maybe a little bit later. So this is what a stock split is. For example, Apple in 2014 had seven for one stock split. So the price of Apple was approximately $700. So what they did is they, for every one stock you have, they gave you seven new stocks. But as a result, your stock price went down to 100. So you have more shares. Rather than having one stock at $700, now you have seven shares and each one is 100. You still have $700. Now why do companies do this? Well, the company do this because if the stock price gets very high, they want to reduce the stock price because it appears expensive. Now why did Apple do it specifically? So why did Apple go through this seven for one? Because Apple wanted to join the Dow, the Dow industrial, and the Dow industrial is a price weighted stock. What does that mean? It means if the Dow industrial, the stock index, accepted Apple at $700, and let's assume Boeing is $200, Exxon is $100, and some other companies is another $100, another $100. So this is $300, $500, and another company is $50, another company is $50 in the Dow $30. So simply put, and another company $100. So let's assume company one, two, three, four, five, six, seven, let's say $100, $200, $300, $400, $500, $700. So those are seven different companies, and you add them all up to come up with a price of $700. Apple alone, if they join the Dow at $700, so if Apple moves, it's the equivalent of those seven companies. And the Dow don't like this, it's a price sensitive. So they told Apple, if you want to join the Dow, you have to split your stock. And this is what Apple did, they split their stock. They did the seven for one split, and they joined the Dow. Now power value is adjusted. In other words, also they split the power value, and obviously the stock price is adjusted as well. Now the good news about the stock split, it doesn't have a journal entry. So simply put, if this is a company with a $10 power value, $20,000 shares, $200,000. Let's assume this company went for two for one stock split. For every share, they're going to give you two. What's going to happen is they're going to have $50,000, $40,000 rather than $20,000. They're going to double the shares. The power value is split in half, and we still have $200,000. Obviously, if this stock price was $50 before the stock split, the day of the stock split, the price will become $25. It will also get adjusted. So everything is adjusted. So nothing changed in terms of total equity. There is no journal entry. It's a memorandum. Basically they would just make a note that they did a stock split. Now also we have a reverse stock split. A reverse stock split is the opposite. So for example, you go from $40,000 to $20,000. Sometimes you go for every 10 shares, we'll give you one share and the stock price will go up. This happens when a company like E-Trade was trading for a long period of time under a dollar. And the NYSE, if you trade for a certain period of time below a dollar, they delist you. Delist means they remove you from the exchange. They no longer publish your prices. So what E-Trade did, they did 10 for one. A one for 10, one for 10, one for 10 stocks. But it means if you have 10 shares, we're going to take away the 10 shares and give you one shares, we're going to multiply the price by 10. Now the price of E-Trade went from $1 to $10, approximately $10, whatever the price was, I assume it was one, you multiply it by 10. Now they're far away from the one. This is called a reverse stock split. Again, from an accounting perspective, we don't have to worry about a reverse stock split. Now the best way to learn this is to go to farhatlectures.com and work multiple choice questions. Farhat Lectures, I don't replace your CPA review course. I don't replace your accounting course. I provide you additional resources that's going to help you do better in your classes, as well as the CPA exam. Don't shortchange yourself, study hard. You are investing in yourself. The CPA exam is worth it. Good luck, study hard, and of course, stay safe.