Treasury Stock Definition Use on Balance Sheets and Example

Treasury Stock Definition

Treasury stock refers to the shares of a company’s own stock that it has repurchased from shareholders and holds in its own treasury. These repurchased shares are no longer considered outstanding and are not eligible to receive dividends or voting rights.

When a company repurchases its own stock, it reduces the number of outstanding shares in the market, which can have various implications for the company and its shareholders. The repurchased shares are typically held by the company for various reasons, such as to use them for employee stock option plans, to support the stock price, or to have additional shares available for future acquisitions.

Treasury stock is recorded on the balance sheet as a contra-equity account, meaning it is subtracted from the total shareholders’ equity. This helps to reflect the reduction in the company’s ownership interest from the repurchased shares.

It is important to note that treasury stock should not be confused with authorized but unissued shares, which are shares that a company is authorized to issue but has not yet issued to the public.

Example:

Company ABC decides to repurchase 1,000 shares of its own stock from the market at $50 per share. After the repurchase, the company now holds these 1,000 shares as treasury stock. The repurchased shares are recorded on the balance sheet as a reduction in shareholders’ equity by $50,000 (1,000 shares x $50 per share).

Treasury stock refers to the shares of a company’s own stock that it has repurchased from the open market or from shareholders. These repurchased shares are then held by the company itself, rather than being retired or canceled. Treasury stock is recorded as a contra-equity account on the balance sheet, which means it is subtracted from the total shareholders’ equity.

The use of treasury stock on balance sheets serves several purposes. Firstly, it allows the company to have additional shares available for future use, such as employee stock option plans or acquisitions. By repurchasing its own stock, the company can control the number of outstanding shares in the market, which can have an impact on the stock price and earnings per share.

Additionally, treasury stock can be used as a tool for capital management. When a company repurchases its own stock, it reduces the amount of cash or other assets held by the company. This can be beneficial if the company believes that its stock is undervalued and wants to invest in itself. By repurchasing shares, the company can increase the value of the remaining shares, benefiting existing shareholders.

However, the use of treasury stock can also have potential drawbacks. If the company repurchases too much of its own stock, it may signal to investors that the company does not have better investment opportunities. This can lead to a decrease in investor confidence and a decline in the stock price. Additionally, the use of treasury stock can reduce the company’s ability to raise capital in the future, as it decreases the number of shares available for sale to the public.

Example of Treasury Stock in Corporate Finance Basics

In corporate finance, treasury stock refers to the shares of a company’s own stock that it has repurchased from the shareholders and holds in its own treasury. These repurchased shares are not considered as outstanding shares and are not eligible for dividends or voting rights.

Let’s consider an example to better understand the concept of treasury stock. ABC Corporation decides to repurchase 10,000 shares of its own stock from the market at a price of $50 per share. The total cost of repurchasing these shares would be $500,000.

There are several reasons why a company may choose to repurchase its own stock. It can be used to increase earnings per share, signal confidence in the company’s future prospects, or provide a way to distribute excess cash to shareholders.