What is Treasury Stock?
Treasury stock is a term used to describe shares that were once part of the outstanding shares of a company but were later repurchased by the issuing company. These stocks do not confer voting rights or the right to receive dividends and are typically held for potential resale, to prevent hostile takeovers, or to use in stock compensation programs. The repurchase of these shares reduces the number of outstanding shares in the market, which can impact various financial metrics, including earnings per share (EPS).
Examples of Treasury Stock
-
Apple Inc. Share Buyback Program: Apple regularly buys back its shares to return capital to shareholders and improve its stock price. For instance, in one fiscal year, Apple repurchased around $75 billion of its stock.
-
Microsoft’s Share Repurchase: Microsoft executed an extensive share repurchase plan, buying back approximately $40 billion worth of its shares over several years to return value to shareholders and manage its capital structure.
-
General Electric (GE) Stock Buyback: GE has implemented multiple stock buyback programs. In one such program, GE bought back shares worth $50 billion as part of its effort to restructure and boost its financial metrics.
Frequently Asked Questions (FAQs)
Q: Why do companies repurchase their own stock?
A: Companies may repurchase their own stock for several reasons, including to boost the stock’s price, to improve financial ratios like EPS, to return capital to shareholders, or to have shares available for employee compensation plans.
Q: How is treasury stock recorded on the balance sheet?
A: Treasury stock is recorded on the balance sheet as a contra equity account, which reduces the total shareholders’ equity. It is usually listed as a negative number under shareholders’ equity.
Q: Does treasury stock impact dividends?
A: Yes, since treasury stock is not considered outstanding, these shares are not entitled to dividends, which can lead to a higher dividend per remaining share if the total dividend payout amount remains unchanged.
Q: Can a company resell its treasury stock?
A: Yes, a company can reissue treasury stock back into the market at any time. The price at which these shares are sold can affect the company’s financial statements, depending on whether they are sold at a price above or below their repurchase cost.
Q: Do shareholders have voting rights for treasury stock?
A: No, treasury stock does not have voting rights, as it is not considered part of the outstanding shares.
Related Terms
- Outstanding Shares: The total number of shares currently held by all shareholders, excluding treasury stock.
- Earnings Per Share (EPS): A financial metric indicating the portion of a company’s profit allocated to each outstanding share.
- Share Buyback: A corporate action in which a company buys back its own shares from the marketplace, reducing the number of outstanding shares.
- Equity: The value of the shares issued by a company.
- Stock Compensation Plan: A program set up by companies to offer shares to employees as part of their remuneration.
Online References
Suggested Books for Further Studies
- “Financial Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe
Accounting Basics: “Treasury Stock” Fundamentals Quiz
Thank you for exploring the intricacies of treasury stock and testing your knowledge with our quiz. May your continued learning yield financial insight and success!
