Question

Discuss what treasury stock is and why a company would want to buy their own stock. Is it accounted for differently than common and preferred stock?

Answer 1

What is treasury shares?

Treasury shares are the shares which are bought back by the issuing company, reducing the number of shares outstanding on the open market.

The shares which have been bought back by a company can either be cancelled or held for reissue.

Why a company would want to buy their own stock?

One of the common reasons companies bet on share buybacks is to increase earnings per share, because share buybacks reduce outstanding shares in the market.

At times when the company feels that the shares are undervalued, a share buyback is used to increase the share price, which acts as a support or a new basis for the share.

Instead of bearing the unnecessary capital burden and dividend payments it requires, the company reimburses the shareholders' investment, lowering its average cost of capital.

However, the purpose of debt and equity capital is to finance growth. The repurchase of a company does not always mean that the issuing company has run out of uses for equity financing.

In fact, it can also be used as a strategic device aimed at generating more social capital without issuing additional shares. Stock repurchases are also used as a means of consolidating ownership.

It is accounted treatment for differently than common and preferred stock.

Treasury stock is that the corporation's issued stock that has been bought back from the stockholders. As a company can't be its own shareowner, any shares purchased by the corporation don't seem to be thought-about assets of the corporation. assumptive the corporation plans to re‐issue the shares within the future, the shares square measure command in treasury and reported as a discount in stockholders' equity within the record. Shares of stock don't have the proper to vote, receive dividends, or receive a liquidation worth. Corporations purchase stock if shares square measure required for worker compensation plans or to amass another company, and to cut back the amount of outstanding shares as a result of the stock is taken into account an honest get. buying stock might stimulate mercantilism, and while not dynamical profit, can increase earnings per share.

The accounting for treasury stock

Treasury shares account debit

                 To Cash/Bank account credit