Definition
Treasury stock refers to shares of a company’s own stock that it has bought back from shareholders. These shares are still considered issued but are not deemed outstanding, meaning they don’t play nice in the sandbox of dividends or voting rights. In short, they’re shares that the company has taken off the market and tucked away securely, like a squirrel hoarding nuts for winter. 🐿️
Key Characteristics of Treasury Stock
- It reduces the total number of shares outstanding in the market.
- It does not pay dividends.
- It is recorded as a contra equity account, which effectively decreases total shareholders’ equity.
- Managed through the cost method (most common) and the par value method.
| Treasury Stock |
Outstanding Stock |
| Bought back by the company |
Still owned by shareholders |
| Not included in dividends |
Eligible for dividends |
| Reduces shareholder equity |
Increases shareholder equity |
| May affect control of the company |
Reflects all votes in shareholder meetings |
Examples of Treasury Stock
-
5,000 shares bought back: Imagine a company initially issues 100,000 shares. They later pull 5,000 shares back into treasury stock. This leaves 95,000 shares outstanding around investors’ dinner tables.
-
Dividends Mystery: If the company pays a dividend of $1 per share, those holding the outstanding shares get $95,000 while the company puts away $5,000 back into its savings account (the treasury).
- Contra Equity Account: A balance sheet account that reduces total equity. Think of it as a financial diet for corporations.
- Earnings Per Share (EPS): A measure of profitability that can improve when treasury stock is bought back, freeing up earnings for fewer shares.
%%{init: {"theme": "default"}}%%
graph LR
A[Treasury Stock] --> B[No Dividends]
A --> C[Reduced Equity]
C --> D[Each Share Gains Value]
E[Outstanding Stock] --> F[Produces Dividends]
F --> G[Distributed to Shareholders]
Humorous Insights
“Buying back stock? That’s just the company’s way of saying, ‘We prefer to have our own company as a shareholder… Fat chance we’re sharing our profits’.” 😂
Fun Facts
- Squirrels of the Business World: Companies generally sweeten the pot with treasury shares to keep them for future operational strategy, like future mergers or attracting back investors.
- Not a Vote in the Polls: Treasury stock is about as useful for voting rights as a pizza at a salad party—it just doesn’t belong.
Frequently Asked Questions
1. What does treasury stock mean for shareholders?
When a company repurchases treasury stock, it typically results in reduced shares, which could increase your percentage ownership. So yes, fewer stocks could mean you’re getting a bigger slice of the pie, as long as that pie is profitable! 🥧
2. Can treasury stock be resold?
Yes! Treasury stocks can be reissued or sold back into the market whenever the company decides to boost liquidity or needs cash.
3. Are treasury shares considered when calculating dividends?
No, they are not factored in at all! They sat out at the dividend dance, sipping soda in the corner like an awkward wallflower. 🍹
Further Reading
Take the Plunge: Treasury Stock Knowledge Quiz
## What is treasury stock?
- [x] Stock repurchased by the company and held
- [ ] Stock that pays dividends
- [ ] Recently issued new stock
- [ ] Shares that are currently lost
> **Explanation:** Treasury stock refers to the shares that have been bought back by the issuing company and held, unlike shares that still reside with willing shareholder souls.
## What effect does treasury stock have on total shareholders’ equity?
- [x] It reduces total shareholders’ equity.
- [ ] It increases total shareholders’ equity.
- [ ] It has no effect.
- [ ] It doubles total shareholders' equity.
> **Explanation:** Treasury stock decreases total shareholders' equity because it is recorded as a contra equity account. No need to panic, though - it's all part of corporate finance!
## Which accounting method for treasury stock is most commonly used?
- [ ] The art of divination.
- [ ] The par value method.
- [x] The cost method.
- [ ] Jedi accounting principles.
> **Explanation:** The cost method is the most commonly used method for recording treasury stocks. Using tricks from Jedi calculating wouldn’t hurt either!
## Does treasury stock receive dividends?
- [x] No, it does not.
- [ ] Yes, all shares do.
- [ ] Only when no one is looking.
- [ ] Only if it behaves nicely.
> **Explanation:** Treasury stocks don’t get dividends—it’s a basic rule of the stock world (and a good thing for their diet too!).
## How can treasury stock impact earnings per share (EPS)?
- [ ] It removes EPS completely.
- [x] It can increase EPS as outstanding shares decrease.
- [ ] It has no effect.
- [ ] It decreases EPS for no apparent reason.
> **Explanation:** By reducing the number of outstanding shares, treasury stock can increase the earnings per share ratio, making that number shine brighter than a shiny new penny.
## What can companies do with treasury shares in the future?
- [x] Resell them.
- [ ] Turn them into soup.
- [ ] Ignore them forever.
- [ ] Use them to buy themselves dinner.
> **Explanation:** Companies often resell treasury shares to raise capital or as a part of equity compensation plans, not for soup but to feed their financial growth.
## What types of shares are not counted as outstanding when calculating dividends?
- [x] Treasury stock.
- [ ] Common stock.
- [ ] Preferred stock.
- [ ] Magic shares.
> **Explanation:** Treasury stock is not included in the outstanding count for dividends—it's like that quiet cousin at family dinners: present but silent.
## When is treasury stock recorded on the balance sheet?
- [x] When it is bought back by the company.
- [ ] When it is sold to investors.
- [ ] When it biannually checks its stock options.
- [ ] When it wins a game of Monopoly.
> **Explanation:** Treasury stock is recorded on the balance sheet when the company repurchases it—no board games needed to figure that out.
## How does treasury stock benefit a company?
- [x] It may enhance stock value.
- [ ] It guarantees zero taxes.
- [ ] It pretty much guarantees eternal love.
- [ ] It entirely reduces risk.
> **Explanation:** Companies may repurchase stock to enhance its value by decreasing the number of shares outstanding—the metaphorical slow clap applauding their central bank logic.
## Why might a company buy back its stock?
- [ ] They love their own shares so much.
- [x] To improve stock prices or as a cash management strategy.
- [ ] They need extra shares to win bingo.
- [ ] To celebrate corporate anniversaries.
> **Explanation:** Companies often buy back stock to enhance value, much more mature and sophisticated than just a heartwarming love story with their shares!
Thank you for exploring treasury stock! Understand the brilliance of equities and stay financially savvy!
