Thursday, 9 August 2012

Negative Effects Of Gambling (Updated, August 2012)


By Jackie, Researcher
Topic: Society (Gambling)

The objectives of this research are to find out what are the most common adverse effects of gambling. There are mainly five effects under this discussion: change in behavior; mental and physical health issues; disrupt school or work activities; financial problems; and family and marital disturbance. Each effect is analyzed clearly with practical real-life examples.


Research Essay
INTI International College Subang
  
Negative Effects Of Gambling


                Adam, a typical middle-aged American, works as an engineer at a construction site in New York. He was married and has two lovely kids. His monthly income is barely sufficient to support his family of four in a moderate way. One day, he heard about the news that his friends had won thousands of dollars by betting in a nearby illegal gambling center. He was so attracted and influenced by the news. After a careful consideration, he had decided to give a try in gambling because if he wins, he can release the financial burden as well as to improve the standard of living of his family. So, he started to gamble. Unfortunately, he became addicted to gambling and his attitudes have changed gradually. He starts to smoke cigarette, drink alcohol and return home lately. His health begins to deteriorate. He suffers from migraine and gastric pain as he did not consumes his meals on time. Due to excess loss of money in gambling, he had borrowed a sum of money from unlicensed loan sharks to settle his gambling debts. The loan’s interest rate was so high until he has to sell off his cars and houses. At work, he was unable to concentrate on his job, often do errors and sometimes absent to work without a valid reason. As a result, he was fired. At home, he always argues and quarrels with his wife over a small matter. Sometimes, his wife gets beaten by him too. Few months later, his wife cannot tolerate with him anymore. As a result, his wife together with his two kids has left him alone. Adam is now jobless and homeless. More and more, addiction to gambling can lead to a change in behaviour, cause serious mental and physical health problems, disrupt school and work activities, increase financial problems, and create disharmony in the family.


Although genetics play an important role in the development of problem gambling in both women and men, 
but the researchers found no evidence of gender differences in the causes of problem gambling.

                Addiction to gambling can lead to a change in mindset, behaviour and attitude. In The Star (‘The adverse effects of gambling’ 2006, p. 23), Malaysia Crime Prevention Foundation (MCPF) states that one could become a dishonest person who has to constantly worry about debts. According to MCPF (2006), whenever a gambler becomes obsessed with gambling, the gambler will do anything including criminal activities like robbing and stealing as long as he or she can gamble. According to the article, gambling addiction can cause negative changes on one attitude such as bad-tempered, withdrawn, neglectful, irrational and irresponsible plus adverse changes in habit like tendency to return home lately and increase in alcohol consumption. Meanwhile, lying, making excuses and becoming more secretive are some of the common ways for gamblers to cover up their gambling act and financial problems. A research done by MCPF had shown that gambling can also encourage one to start smoking and taking alcoholic drinks because it can lower down their stress level and pressure. Besides, gamblers also might tend to isolate themselves from their friends and family as a way to hide or carry out their act. However, this will weaken gambler interpersonal interaction and communication with family members and friends, thus creating more misunderstanding and arguments. All in all, gambling is proven to have a tendency to alter one’s thinking and personality.

It is noted that as gambling escalates, other activities become constricted. Social activities, family interactions and leisure pursuits diminish in frequency, quality and satisfaction as the gambler becomes increasingly detached from interpersonal interaction, isolated and encapsulated in her/his own preoccupation with thoughts of the next session of betting/gaming and where to obtain funds to fuel her/his habits (Lesieur, 1979)

Researchers have found out that highly-addicted gamblers usually isolates themselves and like to be alone. 


                Secondly, gambling can cause mental health issues and physical health problems. According to a study conducted by Centre for Addiction and Mental Health (CAMH), mental health issues include stress, anxiety and depression which will actually cause a gambler to have more difficulty to sleep, think and solve problems. So, gamblers will tend to smoke more as well as to increase in alcohol consumption and possible drug usage to solve these problems. The study also shows severe problem gamblers will have a possible risk of self-harming behaviour such as suicide attempt. Petry (2006) states that addicted gamblers will have the possibility to get insomnia, headaches, back or neck pain, high blood pressure, digestive problems and gastric. She says physical health problems of a gamble is normally disrupted by inappropriate eating time, insufficient exercises and unbalanced sleeping hours. Pathological gamblers were more than twice as likely as people without gambling problems to have angina and nearly three times more likely to have liver disease. They were also almost twice as likely to suffer from tachycardia, an excessively rapid heartbeat (US Federal Survey on Psychiatric Disorders 2006). 


One of the reasons why gambler tends to smoke more and increase in
alcohol consumption is to reduce pressure and stress.

                Besides, for students or workers, gambling can also disrupt both school and work activities. The Council on Compulsive Gambling of Pennsylvania (CCGP 2003) reported that students who are addicted to gambling will tend to increase unexplained absences from school, use school lunch money for gambling, drop in academic performance, unable to pay attention in class, and interrupt their educational goals. Meanwhile, for gambling-addicted workers, Colorado Lottery (CL 2007) warns that they can disrupt working activities through lost in time, lost in productivity, and in desperate situations, the gambler may resort to theft. Working hours are wasted as gamblers use them for gambling purposes like calling bookies for betting and searching gambling results using company’s computer while productivity is lessen as the gambler becomes unreliable, misses project deadlines and important meeting and produces poor working quality. In addition, the inability and inefficiency in working caused by gambling addiction can lead to dismissal. Meanwhile, severe gambling-addicted workers might resort to theft.

Employees with severe problems may commit theft, fraud or embezzlement. Money is the gambler’s key to action. Once all legitimate avenues to obtain cash are exhausted, the gambler, in desperation, may resort to illegal acts to acquire case. The workplace becomes a primary avenue for the gambler to illegally finance their gambling. Gamblers do not see this activity as stealing. They see it as “borrowing money” and plan to replace it when they win (Oregon Department of Human Services 2007).
                Another common adverse effect of addiction on gambling is financial problems. Oak (2009) claims that if a gambling-addicted worker is fired from his or her job, then he or she will lose his or her main source of income due to job loss. Consequently, this will lead to an inability to pay bills, expenses and loans. On the other hand, banks might blacklist poor payment gamblers account but this does not stopped them to borrow money from loan sharks or illegal moneylenders to cover losses and continue betting. For instance, many loan shark cases have been reported in Malaysia during recent FIFA World Cup matches where some gamblers have to sell off their assets like houses and cars to settle off their debts. Severe loss of money in gambling can results in bankruptcy.


Financial problems are the most common effect of gambling. 

Family and marital disturbances are a common end result of a seriously addicted gambler. Lorenz and Shuttleworth (1993) highlighted that fluctuation in mood states, lying and failure to meet obligation lead to marital friction and family disharmony. They found out that unchanged bad attitudes, repeated deceit and broken promises will undermine the sense of trust of a spouse towards the gambler. Meanwhile, they also point out that lack of funds to support children and the home, potential loss of assets and savings, frequent absences at home and neglecting family members can lead to frequent arguments and separation.

Family quarrel usually will happen where the gamblers used to be blamed for causing family and 
marital disturbances, and the most innocent party in this kind of situation is their kids.

In conclusion, these are the five major consequences that can happen frequently in highly-addicted gamblers. As we can see it, the degree of severity depends on how addicted a gambler is which could be found through a change in character as well as other adverse effects caused by them. Many people agree that gambling will not only affect the gambler alone but also creates a lot of trouble to his or her friends and family as well as to the society and community. However, the consequences caused by gambling can be avoided via personal awareness or by getting involved in other more beneficial and meaningful activities. Among the suggestions is to focus on spiritual development, take up sports or a hobby, or do some charity work. Therefore, it is important for us to limit or control, but the best is to avoid gambling activities.


References
Centre for Addiction and Mental Health (CAMH) 2010, The effects of gambling on family, viewed 24 July 2012, http://www.problemgambling.ca/EN/GettingHelp/Pages/TheEffectsOfGambling.aspx
Colorado Lottery (CL) 2007, Problem gambling and the workplace, viewed 24 July 2012, http://www.coloradolottery.com/documents/ProblemGambling/Workplace%20Gambling.pdf
Council on Compulsive Gambling of Pennsylvania (CCGP 2003), Talking to students about gambling, viewed 24 July 2012, http://www.pgcb.state.pa.us/files/compulsive/ccgp_docs/CCGP_Talking_to_Students_About_Gambling.pdf
Lesieur, H 1979, Psychiatry: The compulsive gambler’s spiral of option and involvement, pp.79-87.
Lorenz, V & Shuttleworth, D 1983, The impact of pathological gambling on the spouse of the gambler, Journal of Community Psychology, vol.11, pp.67-76. 
Malaysia Crime Prevention Foundation (MCPF) 2006, The adverse effects of gambling, viewed 7 July 2012, http://thestar.com.my/fightcrime/resources/story.asp?file=/2006/3/11/resources/20060316165242&sec=resources
Oak, M 2009, Negative effects of gambling, viewed 25 July 2012, http://www.buzzle.com/articles/negative-effects-of-gambling.html
Oregon Department of Human Services (ODHS) 2007, Problem gambling on the job. How you can help your work force, p.2, viewed 24 July 2012, http://www.oregon.gov/DHS/addiction/gambling/workplace-brochure.pdf?ga=t
Petry, N 2006, Problem gamblers may have poorer health, viewed 25 July 2012, http://www.iol.co.za/index.php?set_id=1&click_id=31&art_id=qw116507160221B243

Wednesday, 8 August 2012

Better Business Reporting in Excel

What do you think is the most-used reporting tool in the world?  There are a lot of them available, at times it can be hard to move without running into a new Business Intelligence (BI) tool, but I'm going to hazard a guess with a high degree of confidence that the most used tool is still Excel.

Excel may not be where the data originated from and there may well have been a database involved to crunch numbers and aggregate to the point that the data would fit comfortably in Excel, but I do believe that it's still the most widely used tool for final 'analysis' and presentation of data.

This is not because Excel is the best tool for the job as almost every feature of Excel is handled better by another tool.  Joining separate tables of data with Lookup functions is a very pale shadow of using a properly defined database and the SQL language.  There are substantially better graphics, charting and visualization tools available.  The analysis tools (Correlation, Regression, ANOVA, Linear-programming) are the poor relation to more industrial strength packages.



So why do we (almost) all use Excel?  Perhaps because it is so very accessible?   It's cheap enough that everyone can have a copy.  Simple enough that everyone can make at least some use of it and the tools are good enough for most of the uses that it's put to.

I worked recently with a Demand Signal Repository (DSR) that is used to analyse and report on 3 Terabytes of Point of Sale data.   (FYI - 3TB is equivalent to around 6 million average sized spreadsheets).  The data is held and crunched in Microsoft's SQL Server database using a highly unusual (but very effective) data structure combined with a application specific querying engine that rapidly dumps out the data you need for reporting into ... Excel!   Once in Excel I have routinely turned to pivot-tables for 90% of the reporting.

  • They are very fast to build
  • They can be very flexible to change.  A good pivot-table report built for one brand or store or manager will run just as effectively for any other, just change the data and re-run.
  • They typically require no coding at all.  Reports that need custom code are always going to be more fragile than ones that use well-designed, heavily tested and heavily used code.
  • They are immediately drill-able to the lowest level of detail that you pulled into the spreadsheet
  • With a few tricks up your sleeve to deal with some of the limitations of pivot-tables, you can get a very long way, fast.
Pivot-tables are not perfect, they have a number of foibles, but, there are 2 things that pivot-tables absolutely will not do that cause me the most problems:
  • Pivot-tables do not implement so called "semi-additive" measures.  I know that sounds nerdy but its a real problem when you are dealing with inventory.  A semi-additive measure is one that is additive in some dimensions but not all..  If I am working with Inventory data, I can reasonably add across locations and products and get a sensible answer.  If I have $100 of inventory for each of 10 products at each of 5 stores , I do have 100*10*5 = $5,000 worth of inventory.  You cannot do this across time.  If I have $5,000 of inventory at the start of the week and $6,000 at the end of the week I do not have $11,000 of inventory.  What this means for Pivot-Table reporting is that I cannot aggregate data across time directly in the pivot-table, neither can I drill-down on that dimension.
  • The second issue is with graphical display.  Pivot-charts seems so weak in comparison to the pivot-tables used to create them.  
There is not much I can do about the first one other than be aware of it,  await a better though probably much more complicated tool and warn others . (I''ve just checked that off my list)

The graphical display issue  I can do something about.  The main problem is this: once I get a pivot-chart set up as I need it for one group of products or locations, then to see the next group I must select it from a  Page Field filter. Look at the example below. (The Page Field filter is in cell B1).  I've built a pivot-chart on top of the pivot-table (not one of my best, this was just for testing), embellished it with a few formulas that update with the pivot-table and formatted the 2 into one area that should print well.


If there are 10 of these groups I must change the filter 10 times to see them all.  If I want to compare and contrast between them I must flip-flop back and forth or print them all, one to a page.  Not very satisfactory and severely limiting for reports that people expect to just print.

What I've wanted for some time now (and finally built) was an add-in that would take care of this.   An Excel add-in:
  •  that builds grids of reports with multiple copies of a template sized to fit the page. 
  • where  report templates are just a range of cells in a worksheet so that you can build templates with: charts, formulas, images, pivot-tables, text boxes, anything that can be added to the worksheet.   
  • where you specify the template and output in a dialog box (without coding)
The original example now looks more like this and, in Excel, its ready to print, sized just right for the paper-size (letter) and orientation (landscape) I selected.


Refresh the Pivot-table with new data and with 1 click of the mouse (or 1 line of code in a subroutine if you prefer to automate) and it will rebuild adding or removing copies of the template as required to fit the data that's now there.

We've actually added rather more functionality to this that I originally planned, the full feature list is shown below:
  • Lightweight, Microsoft-Excel add-in (2007, 2010) 
  • Easy to install and easy to use.
  • Templates are just a range of cells in a worksheet. 
  • Build templates with: charts, formulas, images, pivot-tables, text boxes, anything that can be added to a worksheet.
  • Layout tools make it easy to build clean, professional templates.
  • Select the number of rows and columns per page in your report
  • Automatically scale to fit the page-size and orientation.
  • Generate multiple 'Grids in the same workbook
  • Work with multiple page-fields so the rows and columns have meaning
  • Optionally add outlines, border gaps and shadows
  • Refreshes in seconds, on demand.
  • Write the chart legend to a header section, printed on each page
  • Lock value axes so they all show the same range
  • Easy to automate
This tool will be released soon as a free add-in that you can download from (www.crabtreeanalytics.com).  For the next few weeks, it's going through beta testing .  

Here are a few more examples of the output:

Bar Charts

Scatter Plots with regression lines and a data driven text box

New product tracker, Distribution, Units per Store per Week and Total Sales
3 charts per cell, all from 1 pivot-table

Histograms with summary statistics



Tuesday, 31 July 2012

Foreign Exchange: Arbitrage Opportunity (Critical Review)


By Jackie, Researcher
Topic: Education
Area of discussion: Finance
Chapter: Foreign exchange – Arbitrage opportunity

The objectives of this research are to find out how people actually earn money via foreign exchange, how they do that (the steps like what currencies they need to buy and sell), how to make a good use of arbitrage opportunity to earn unlimited profit, how to calculate arbitrage profit (sample questions, examples, and calculations are provided to ease understanding) and the limitation and assumption of arbitrage opportunity in foreign exchange (what conditions must be fulfilled in order for this ‘arbitrage opportunity’ to hold).


Introduction
Well, in finance, I always heard about “high risk, high return” concept, but this arbitrage concept is totally different. I was really amazed by its concept: No risk, unlimited return (profit is infinity). Ideally, ‘arbitrage’ involving a simultaneous transaction to be entered at the same time, that is, the purchase and sale of currencies at the same time in order to earn ‘arbitrage profit’ due to differences in currencies price quoted in different places (markets). It is a trade where profits are made by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies. The reason why no risk is involved is because transactions are entered simultaneously. There is no delay in time, as time resembles risk and uncertainly in finance. Unlimited profits are possible for an astute (alert and smart) trader by re-entering or repeating those transactions again and again, until the market become efficient or equilibrium.


Triangular arbitrage
Triangular arbitrage (also referred to as ‘cross currency arbitrage’ or ‘three-point arbitrage’) is the act of exploiting an arbitrage opportunity resulting from a pricing discrepancy among three different currencies in the foreign exchange market. A triangular arbitrage strategy involves three trades, exchanging the initial currency for a second, the second currency for a third, and the third currency for the initial. During the second trade, the arbitrageur locks in a zero-risk profit from the discrepancy that exists when the market cross exchange rate is not aligned with the implicit cross exchange rate.


Let’s look at this example:

Suppose we observe these banks posting these exchange rates:

  Westpac quote - A$/€  A$1.2223/€
  Barclays quote - A$/£  A$1.8410/£
  Deutsche quote - €/£   €1.5100/£




[One round trip]

Westpac Bank uses A$1,000,000 to exchange to pound at Barclays Bank at A$1.8410/£. This will give Westpac Bank £543,183. This amount is then, exchanged to euro at €1.5100/£ at Deutsche Bank. This will give Westpac Bank €820,206. Finally, this amount is converted back to Australian dollar at A$1.2223/€ in Westpac Bank itself. This will give Westpac Back A$1,002,538.

Arbitrage profit for one round trip: A$2,538.


Condition for arbitrage opportunity:
It is assumed that Interest Rate Parity (IRP) did not hold. If IRP holds, then there will be no more arbitrage opportunity. Besides, transaction costs are normally ignored during calculation. In reality, transaction costs will lower down the arbitrage profit. In addition, it is assumed that no capital controls are involved. Governments sometimes restrict import and export of money through taxes and outright bans.


Interest Rate Parity (IRP)


The ratio between the risk free interest rates in two different countries is equal to the ratio between the forward and spot exchange rates. Ideally, Interest Rate Parity (IRP) is a non-arbitrage condition representing an equilibrium state under which investors will be indifferent to interest rates available on bank deposits in two countries.


An illustration when Interest Rate Parity (IRP) holds:



An illustration when Interest Rate Parity (IRP) failed to hold:



Additional readings, related links and references:

This link provides a simple definition and few good examples of arbitrage as well as certain underlying assumptions for arbitrage theory to hold. Good link to view at for new learners or beginners.

An explanation of what is arbitrage and how to use it in the forex market to generate quick, safe, profits.

Step-by-step video tutorial and guides related to the ‘triangular arbitrage concept’ in currency markets.

Triangular arbitrage’s definition and calculation is available in this link. Extremely brief article, but I believe beginners can have a basic understanding about this concept by viewing this (at a glance).

How to calculate currency cross rate and triangular arbitrage calculation to find arbitrage profit is shown in this link.

Sunday, 29 July 2012

WARNING: Bad business analytics may be hazardous to your wealth !

You paid handsomely for the software, perhaps for consulting too and have had some bright sparks working on it for months: the results of your analytics project are in and the answer is ... useless without some understanding of how good the models are it's built on.  If the analyst cannot give you detail on how 'good" the model is for its purpose, all results should come with a wealth warning. 


BAD BUSINESS ANALYTICS MAY BE HAZARDOUS TO YOUR WEALTH.


Let's take a few real-life examples:

  • A project to improve sales forecasting where the accuracy of the forecast was not measured either before or after the project.
  • A project to maximize trailer loading (get more tonnage into freight trailers) with such a bad optimization model that it missed most of the opportunity.
  • A system to improve On-Shelf-Availability (the % of product actually on shelf in grocery stores) built entirely from arbitrary rules with no measurement, at all, of...On Shelf Availability.  Check out my post Point of Sale Data – Supply Chain Analytics for more details on On Shelf Availability.
  • Statistical inventory models to identify how much inventory you really need built entirely without  statistics. (Managing hundreds of $millions in inventory value)
  • Countless excel models that calculate nothing of value.
I could go on..

In many cases the issue is that the people assigned to the task do not have the skills to wield the tools they need.  The trailer loading project listed above was developed without real understanding of how to build an optimization model.  The developer had found an extended version of Excel's "Solver"  tool on the internet (a good small to medium scale optimizer from Frontline Systems).  Unfortunately the Excel model  was bad enough that Solver could only find the optimal solution to the wrong question: the model ran without throwing an error; it was a small improvement on what went before; the results were implemented; and the opportunity to do it right (worth $millions) was lost for a few years.

In other cases, and I saw a new one just this last week, the software tools leave out the diagnostics you need to tell whether the model is good.  Predictive Analytics tools packaged for business use (like price/promotion modeling packages, sales forecasting tools) tend to do this.  I can only assume that this is to prevent confusing the user.  

Before you use any tool's output to make critical decisions, someone with good modeling skills (perhaps your Primary Analytical Practitioner)  needs to check that your models are sound.

As my father taught me: “If a job is worth doing, it's worth doing well.”  How can that not be true when your financial results depend on getting it right ?  


Sunday, 22 July 2012

Absorption Vs Variable Costing (Critical Review)


By Jackie, Researcher
Topic: Education
Area of discussion: Cost & Management Accounting
Chapter: Income effects of alternative cost accumulation systems

The objectives of this research are to explain the differences between an absorption costing and a variable costing system, prepare profit statements based on variable costing and absorption costing system, explain the difference in profits between variable and absorption costing profit calculations, explain the arguments for and against variable and absorption costing, and a clear example was taken from college exam to be used in this discussion followed by step-by-step guide and answer.

Introduction
Basically, absorption costing treats all manufacturing costs as product costs, regardless whether they are variable or fixed. On the other hand, variable costing only treats those manufacturing costs that vary with output as product costs. Fixed manufacturing overhead is not treated as production cost under this method, but rather treated as period cost. Thus, the cost of a unit of product in inventory or cost of goods sold under the variable costing method does not contain any fixed manufacturing overhead cost and therefore, the product cost per unit computed using variable costing is always lower than the product cost per unit computed using absorption costing. Their similarity is both of them are in complete agreement regarding the treatment of non-manufacturing costs as period costs. Please note that, variable costing is also sometimes referred to as ‘direct costing’ or ‘marginal costing’.


The differences between absorption costing and variable costing

Let’s take a look at this sample question:












Some arguments in support of variable costing

Variable costing provides more useful information for decision making
Data required by CVP (cost-volume-profit) analysis can be taken directly from contribution format in income statement which is only available in variable costing. Those data are extremely useful in calculating expected sales level to break-even, or expected sales level to earn a specific profit, margin of safety and contribution per unit. Besides, those relevant costs data are also required for a variety of short-term decisions making. For examples, make or buy decision as well as product mix decision.

Variable costing avoids fixed overheads being capitalized in unsaleable stocks
When a company produced a large amount of stocks but did not sold all of them, the fixed production overheads incurred during that particular period will be included in stock valuation. The stocks will therefore be over-valued. Profit calculation for that particular period will be misleading, where by current period’s profits will be over-stated.


Some arguments in support of absorption costing

Fixed overheads are essential for production
Production of goods is not possible if fixed manufacturing overhead costs are not incurred. Thus, fixed manufacturing overhead costs should be allocated to units produced and included in inventory valuation.

Consistency with external reporting
External reporting requires all manufacturing costs (including fixed production overhead) to be included as part of product cost. That is why external reporting did not recognize variable costing method as they failed to include fixed manufacturing overhead costs inside their cost of production.



Addition readings, related links and references:

Variable Costing Vs Absorption Costing: Definition, explanation & unit cost computation.

Income Comparison of Variable and Absorption Costing

Advantages and Disadvantages of Absorption Costing System

Management Accounting: Variable Vs Absorption Costing

Marginal Costing Vs Absorption Costing Homework Help, Tutoring

Monday, 9 July 2012

Stock Dividend Vs Stock Split (Critical Review)


By Jackie, Researcher
Topic: Education
Area of discussion: Finance
Chapter: Dividend policy
Subchapter: Alternatives to cash dividends – Stock dividend & Stock split

The objectives of this research are to find out what are the major differences and similarities between stock dividend and stock split, what are the effects on financial statements when a company issues a stock dividend or a stock split, how to enter those transaction into the appropriate accounts and the required adjustment that ought to be made to the financial statements. By the way, this topic is very popular as questions are often set out from this chapter in finance examination. Therefore, it is good to actually understand and gain some knowledge about the basic concept of stock dividend and stock split although we might not be playing shares in real-life.

Introduction
In term of definition, stock dividend (also known as ‘scrip dividend’) is a dividend payment made in the form of additional shares, rather than a cash payout. Ideally, company may decide to distribute stock to shareholders instead of cash dividend if the company’s cash availability is in unfavourable condition. These distributions are generally acknowledged in the form of fractions paid per existing share. An example would be a company issuing a 5% stock dividend for each single share held. On the other hand, stock split (also known as ‘scrip issue’, ’bonus issue’ and ‘free issue’) is a corporate action in which a company existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.

Let’s take a look at this example: 

Question taken from IICS past year examination, also special thanks to Mr.Lim for his kind teachings. 

Solution for (i):

When 10% stock is declared, then the number of shares outstanding will also be increased by 10%, that is from 10,000 shares to 10,000(1.1)=11,000 shares.

This indirectly indicates that the new share issued is equal to 1,000 shares.

The overall effects on the owner’s equity accounts are:

Common stock (£1 par value) will increase by £1,000 (£1 par value per share x 1,000 newly issued shares due to 10% stock dividend).

Capital surplus (also known as ‘share premium’) will be also increase by £24,000. Please note that share premium is equal to market price minus the par value. Thus, share premium per share is £25 per share - £1 per share = £24 per share. After that, this share premium per share needs to be multiplied by 1,000 shares in order to get £24,000 which is the total share premium due to 10% stock dividend.

Retained earnings will be decreased by £25,000. This is derived from the market price which is £25 per share, then multiply with 1,000 shares in order to get £25,000.


Alteration in owner's equity accounts after 10 percent stock dividend is declared


Solution for (ii):

(This is actually more or less, quite similar with question (i))

When 25% stock is declared, then the number of shares outstanding will also be increased by 25%, that is from 10,000 shares to 10,000(1.25)=12,500 shares.

This indirectly indicates that the new share issued is equal to 2,500 shares.

The overall effects on the owner’s equity accounts are:

Common stock (£1 par value) will increase by £2,500 (£1 par value per share x 2,500 newly issued shares due to 25% stock dividends).

Capital surplus (also known as ‘share premium’) will be also increase by £60,000. Please note that share premium is equal to market price minus the par value. Thus, share premium per share is £25 per share - £1 per share = £24 per share. After that, this share premium per share needs to be multiplied by 2,500 shares in order to get £60,000 which is the total share premium due to 25% stock dividend.

Retained earnings will be decreased by £62,500. This is derived from the market price which is £25 per share, and then multiplies with 2,500 shares in order to get £62,500.


Alteration in owner's equity accounts after 25 percent stock dividend is declared


Solution for (iii):

In this case, ‘three-for-one stock split’ means each existing share is divided into three. Therefore, the shares outstanding after the stock split will be 30,000 shares (10,000 shares x 3). When this happen the par value per share will also divided by the split ratio of three, i.e. £1 ÷ 3 = £0.3333 per share. Hence, these are the only effects of the split.

Please note that the equity accounts are unchanged except that the par value of the stock is changed by the ratio of new shares to old shares.


Alteration in owner's equity accounts after a 'three-for-one stock split' is declared


Solution for (iv):

For this question, it is a bit special because it is deal with ‘reverse stock split’, a condition where the shares are combined instead of splitting according to its ratio. For ‘one-to-five reverse stock split’, it simply means that for every five existing shares, they are combined into one share. Thus, 10,000 existing shares will become 2,000 shares after the reverse stock split (10,000 shares ÷ 5). The par value will change to £5 per share (£1 x 5).


Alteration in owner's equity accounts after a 'one-for-five reverse stock split' is declared



Extra sharing:
Additional question and answer of which I took from my college past year question, it is solely focus on essay part (the differences). Thus, very theoretical and need deep analytical skills.

This Q&A explains the differences between stock dividend and stock split, their effects on equity accounts
 and their respective accounting treatment with examples to aid explanation.


Additional readings, related links and references:

Part 5: Stock Splits and Stock Dividends

Chapter 14: Stock Splits and Stock Dividends

Stock Dividends and How They Are Different From Stock Splits

Chapter 18: Shareholders’ Equity (Stock Dividends and Splits)

The Effect Of Stock Splits & Stock Dividends On The Market Share Price