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What Is Treasury Stock and Its Importance?

by Jul 9, 2017Accounting

It is necessary to comprehend the fundamental terms of entrepreneurship to understand the finances of the company as a business owner or a student. Treasury Stock is a very common term used by financial experts of the industry to protect the shares of the enterprise. Treasury stock homework answers can help the knowledge seekers to understand these norms in better ways. This piece will lead through everything about Treasury Stock in and out.

What is Treasury Stock?

Treasury Stock is also known by Treasury Shares, and it refers to shares of the company which belongs to the enterprise. These shares are not available for the public to buy for investment.

Why is it called Treasury Stock or Treasury Shares?

The percentages of shares company keep with it, can be used for cash whenever needed. So, it is a type of hidden treasure for the business. Although, money is not only the reason why the company keeps treasury shares.  There are other causes involved in keeping some percentages of shares with the company itself.

How can a share be Treasury Stock for a firm?

There are various ways in which company introduces about Treasury Shares on its balance sheets as treasury stock homework answers teaches about finances.

The very first scenario is typical in the majority of the firms. At the time of the foundation of business firm, shares are created. Now, Suppose, after the foundation of company XYZ, 40% of the shares are distributed to the public, and 60% of the stock kept within the company for investors. This 60 % portion of stock is identified as Treasury Stock of the enterprise. This situation is very common in the majority of the firms.

Secondly,  It is also possible that company buys its shares from the open market and does the buyback. These shares are divided among investors and partners of the firm and are not available to the public. ‘Outstanding Shares’ in also another term used by financial geeks for inside stocks. Remaining part of shares which is open to the public is labeled as ‘float.’

Prime purpose of treasury stock explained by treasury stock homework answers

By now you have gained a good understanding of what the Treasury Stock is in the companies. But, it is essential to understand why would a company keep such thing as Treasury Stocks.

Treasury Stock or Treasury Share is beneficial when business converts the shares into cash. The equity portion of the balance sheet demonstrates a positive balance in the common stock and additional paid-in capital accounts.

Let us get to know the benefit of Treasury Stock better with a simple example.

  • Company XYZ is founded with fewer investors and received less funding than planned. Now, in order to function properly, company XYZ has hired employees for every department. Salary of the employees and employee bonus are major concerns for the enterprise as small financial funding.

Moreover, people are not ready to work with small-scale companies with less salary structure. In the initial period of company foundation, the business needs talented individuals who work with their heart and give over time regardless of wages.

Treasury Shares can help the best in such situations. The company can deal with high skilled, workaholic individuals to offer them the portion of outstanding shares as a bonus.

  • Treasury stock homework answers shows advantage of Treasury Stock that it is significant for improving financial image of the firm

There are times when a company buys back shares from the market. It signifies that company is financially growing and investing the cash in stocks. Now, who wouldn’t want to invest in such a company which is investing excess cash? Treasury Stocks attracts more investors for the growing business.

  • Price manipulation strategy with Treasury Stock

Financial experts have used this method for years to boost up the price of shares. By buying its shares, the company leaves fewer outstanding shares in the market for the public. When there are fewer shares variable, the prices go high. By using this tactic,    the company goes to the top via manipulating the value of shares.

Apart from having some benefits of Treasury Stocks, there are important things regarding Treasury Stocks needs to be understood as explained by treasury stock homework answers.

Everything has two sides of it. The positive one and the negative one. Having Treasury Stock certainly, provides wealth to the company, but it is not cash. The other perspective to look at Treasury Stock is the richness of it is not cash. Real example, can explain it in a better way.

  • Suppose company XYZ has its 60% of shares as Treasury Stock and a company is running low financially. The company has the money but not in the form of cash. And whatever is not cash has fluctuating values under different circumstances.
  • For example, you do not have enough money for necessities, but you have gold. The value of gold can be fluctuating time to time. One cannot use it right away for food. Instead, the person would want to wait for the best possible opportunity for raising cash against it. Treasury Stock is the kind of wealth on paper.

Can the company sell the shares again in the market?

Treasury stock homework answers says yes, companies can reissue the Treasury Stock back to the market. Moreover, the company can also cancel them if it is required.

All in all, Treasury Stock is important to increase the value of shareholders, help the company against hostile takeovers and betterment of financial image of company.