Treasury Stock
Treasury stock is a term used in accounting to describe the securities that a company has purchased from its own treasury. These securities are often used to manage cash flow and liquidity.
Types of Treasury Stock:
- Treasury Bills: Short-term securities that are issued by governments or corporations to investors.
- Treasury Notes: Medium-term securities that are similar to Treasury bills but have a longer maturity.
- Treasury Bonds: Long-term securities that are similar to Treasury notes but have a longer maturity.
Reasons for Purchasing Treasury Stock:
- Cash Flow Management: Treasury stock can be used to manage cash flow by providing a source of funds when needed.
- Liquidity: Treasury stock can be used to enhance liquidity by providing a market for investors to sell their securities.
- Interest Rate Hedge: Treasury stock can be used to hedge against rising interest rates.
- Hedge Against Inflation: Treasury stock can be used to hedge against inflation by increasing in value when inflation rises.
Accounting Treatment:
Treasury stock is generally accounted for at cost and is not recorded on the company’s balance sheet. Instead, it is recorded in a separate account called the treasury stock account.
Impact on Financial Statements:
Treasury stock does not have a significant impact on financial statements, as it is not recorded on the balance sheet. However, it can affect cash flow statements and interest expense calculations.
Example:
A company purchases $10,000 of Treasury stock. The company will record the purchase in its treasury stock account but will not record it on the balance sheet. When the company sells the Treasury stock, it will receive cash and reduce its treasury stock balance. The difference between the purchase price and the sale price will be recorded in the cash flow statement.
Additional Notes:
- Treasury stock is a type of marketable security.
- Treasury stock can be used to manage a company’s own debt or to manage the debt of its subsidiaries.
- Treasury stock can be traded on the open market or privately.
FAQs
What is treasury stock?
Treasury stock refers to shares that a company has issued and later reacquired from the public. These shares are not considered when calculating earnings per share (EPS) or dividends, as they are no longer outstanding but remain held by the company.
Why do companies buy treasury stock?
Companies buy back treasury stock to reduce the number of outstanding shares, which can increase earnings per share, boost stock prices, and return value to shareholders. It also allows the company to use the shares for employee compensation or future fundraising.
Is treasury stock an asset or equity?
Treasury stock is not considered an asset but rather a contra-equity account. This means it reduces the total equity on a company’s balance sheet, as the purchase of treasury stock decreases the overall value of the shareholders’ equity.
How is treasury stock shown on the balance sheet?
Treasury stock is recorded as a deduction from total shareholdersโ equity on the balance sheet. It is usually listed under shareholders’ equity as a negative balance, reflecting the cost of repurchasing the shares.
What are the disadvantages of treasury stock?
Some disadvantages of treasury stock include reducing the company’s available cash, lowering the company’s equity, and potentially signaling to investors that the company has no better investment opportunities. Additionally, excessive buybacks can lead to a loss of shareholder value if not managed properly.
