Which of the following statements is a reason why a company would buy treasury stock?
Show
What is the Statement of Changes in Equity?The statement of changes in equity is a reconciliation of the beginning and ending balances in a company’s equity during a reporting period. It is not considered an essential part of the monthly financial statements, and so is the most likely of all the financial statements not to be issued. However, it is a common part of the annual financial statements. The statement starts with the beginning equity balance, and then adds or subtracts such items as profits and dividend payments to arrive at the ending ending balance. The general calculation structure of the statement is as follows: Beginning equity + Net income – Dividends +/- Other changes = Ending equity Contents of the Statement of Changes in EquityThe transactions most likely to appear on this statement are as follows:
Presentation of the Statement of Changes in EquityThe statement of changes in equity is most commonly presented as a separate statement, but can also be added to another financial statement. It is also possible to provide a greatly expanded version of the statement that discloses the various elements of equity. For example, it could separately identify the par value of common stock, additional paid-in capital, retained earnings, and treasury stock, with all of these elements then rolling up into the ending equity total. Preparation of the Statement of Changes in EquityTo prepare the statement, follow these steps:
Treasury stock is the term that is used to describe shares of a
company’s own stock that it has reacquired. A company may buy back its own stock for many reasons. A frequently cited reason is a belief by the officers and directors that the market value of the stock is unrealistically low. As such, the decision to buy back stock is seen as a way to support the stock price and utilize corporate funds to maximize the value for shareholders who choose not to sell back stock to the company. Other times, a company may buy back public shares as part of a
reorganization that contemplates the company “going private” or delisting from some particular stock exchange. Further, a company might buy back shares and in turn issue them to employees pursuant to an employee stock award plan. Whatever the reason for a treasury stock transaction, the company is to account for the shares as a purely equity transaction, and “gains and losses” are ordinarily not reported in income. Procedurally, there are several ways to record the “debits” and “credits”
associated with treasury stock, and the specifics can vary globally. The “cost method” is generally acceptable. Under this approach, acquisitions of treasury stock are accounted for by debiting Treasury Stock and crediting Cash for the cost of the shares reacquired: The effect of treasury stock is very simple: cash goes down and so does total equity by the same amount. This result occurs no matter what the original issue price was for the stock. Accounting rules do not recognize gains or losses when a company issues its own stock, nor do they recognize gains and losses when a company reacquires its own stock. This may seem odd, because it is certainly different than the way one thinks about stock investments. But remember, this is not a stock investment from the company’s perspective. It is instead an expansion or contraction of its own equity. Treasury Stock is a contra equity item. It is not reported as an asset; rather, it is subtracted from stockholders’ equity. The presence of treasury shares will cause a difference between the number of shares issued and the number of shares outstanding. Following is Embassy Corporation’s equity section, modified (see highlights) to reflect the treasury stock transaction portrayed by the entry. If treasury shares are reissued, Cash is debited for the amount received and Treasury Stock is credited for the cost of the shares. Any difference may be debited or credited to Paid-in Capital in Excess of Par.
Principlesofaccounting.com ™ Copyright © 2022. All rights reserved. Why would a company buy treasury stock?The benefits to having treasury stock for a company include limiting outside ownership as well as having stock in reserve to issue to the public in the future in case capital needs to be raised.
Which of the following statements about treasury stock is true?The true statement is c. Reacquiring treasury stock causes stockholders' equity to decrease.
When a company purchases treasury stock How are the financial statements affected?Treasury stock is a contra equity account recorded in the shareholders' equity section of the balance sheet. Because treasury stock represents the number of shares repurchased from the open market, it reduces shareholders' equity by the amount paid for the stock.
What is a treasury stock purchase?A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings).
|