Treasury Stock

Definition

Treasury stock refers to a company's own shares that have been repurchased and are held by the company itself. These shares are not outstanding and do not carry voting rights or receive dividends, but they can be reissued or retired by the company at a later date.

5 Must Know Facts For Your Next Test

1. Treasury stock is reported as a contra-equity account, reducing the total amount of stockholders' equity on the balance sheet.
2. Companies may repurchase their own shares for various reasons, such as to increase earnings per share, prevent a hostile takeover, or distribute the shares to employees as part of a compensation plan.
3. The cost of acquiring treasury stock is recorded as a debit to the treasury stock account, and the subsequent reissuance of treasury stock is recorded as a credit to the treasury stock account.
4. Treasury stock transactions can affect a company's financial ratios, such as the debt-to-equity ratio and the current ratio, by changing the composition of the company's capital structure.
5. The accounting treatment of treasury stock can vary depending on the specific laws and regulations in the country where the company is based.

Review Questions

• Explain how treasury stock is reported on the Statement of Owner's Equity and how it impacts the company's financial position.
  • Treasury stock is reported as a contra-equity account on the Statement of Owner's Equity, reducing the total amount of stockholders' equity. This is because the company has repurchased its own shares, which are no longer considered outstanding. The presence of treasury stock on the balance sheet can impact the company's financial ratios, such as the debt-to-equity ratio and the current ratio, by changing the composition of the company's capital structure. The accounting treatment of treasury stock can also vary depending on the specific laws and regulations in the country where the company is based.
• Describe the reasons a company may choose to repurchase its own shares and become the holder of treasury stock.
  • Companies may repurchase their own shares for various reasons, such as to increase earnings per share, prevent a hostile takeover, or distribute the shares to employees as part of a compensation plan. By repurchasing and holding its own shares as treasury stock, the company can effectively reduce the number of outstanding shares, which can lead to an increase in earnings per share. Additionally, holding treasury stock can give the company more flexibility in managing its capital structure and defending against potential takeover attempts.
• Analyze how the accounting treatment of treasury stock transactions can impact the completeness and accuracy of the company's financial forecasts.
  • The accounting treatment of treasury stock transactions can have a significant impact on the completeness and accuracy of a company's financial forecasts. The cost of acquiring treasury stock is recorded as a debit to the treasury stock account, and the subsequent reissuance of treasury stock is recorded as a credit to the treasury stock account. These transactions can affect the company's financial ratios, such as the debt-to-equity ratio and the current ratio, which are important inputs in the financial forecasting process. Additionally, the specific laws and regulations governing the accounting treatment of treasury stock can vary across different countries, further complicating the forecasting process and requiring a thorough understanding of the relevant accounting standards.

Related terms

Authorized Shares: The maximum number of shares a company is legally permitted to issue, as specified in its articles of incorporation.

Issued Shares: The total number of shares a company has sold to investors, including both outstanding shares and treasury shares.

Outstanding Shares: The number of shares currently held by investors, excluding any treasury shares.