Unveiling the Myth- Which of the Following Statements is NOT True About Treasury Stock-

Which of the following is not true about treasury stock?

Treasury stock, also known as treasury shares, refers to the shares of a company’s own stock that it has repurchased from the open market. These shares are no longer considered outstanding and are held by the company itself. While it is a common practice for companies to repurchase their own stock, there are several misconceptions about treasury stock. In this article, we will explore some of the most common myths and truths about treasury stock to help clarify the situation.

One of the most common misconceptions about treasury stock is that it is the same as authorized shares. This is not true. Authorized shares are the maximum number of shares a company is allowed to issue, while treasury stock represents the shares that have been repurchased and are being held by the company. Therefore, the statement “Treasury stock is the same as authorized shares” is false.

Another myth is that treasury stock can be used to pay dividends. While it is true that a company can use treasury stock to pay dividends, it is not a common practice. Dividends are typically paid on outstanding shares, and treasury stock is not considered outstanding. Therefore, the statement “Treasury stock can be used to pay dividends” is not entirely accurate.

A common misconception is that treasury stock is a liability on the company’s balance sheet. In reality, treasury stock is not a liability but rather an equity account. It represents the company’s own shares that have been repurchased and is reflected in the shareholders’ equity section of the balance sheet. Therefore, the statement “Treasury stock is a liability on the company’s balance sheet” is false.

Another myth is that treasury stock cannot be resold. This is not true. While a company may restrict the resale of treasury stock to certain conditions or require approval from the board of directors, there is no legal prohibition against reselling treasury stock. Therefore, the statement “Treasury stock cannot be resold” is false.

Lastly, a common misconception is that the issuance of treasury stock will decrease the company’s market capitalization. This is not true. The issuance of treasury stock does not affect the company’s market capitalization, as it is merely a transfer of shares from the outstanding stock to the treasury stock. The market capitalization is determined by the number of outstanding shares multiplied by the stock price. Therefore, the statement “The issuance of treasury stock will decrease the company’s market capitalization” is false.

In conclusion, while there are several misconceptions about treasury stock, it is important to understand the true nature of this financial instrument. By dispelling these myths, we can have a clearer understanding of how treasury stock impacts a company’s financial statements and operations.