Question

Treasury stock is normally reported as a(n):

1) Expense account
2) Liability account
3) Reduction of total stockholders' equity
4) Asset account

Answer 1

Treasury stock is reported as a reduction of total stockholders' equity on a company's balance sheet, acting as a contra equity account and decreasing the company's net worth.

Step-by-step explanation:

Treasury stock is normally reported as a reduction of total stockholders' equity. The 'T' in a T-account separates the assets of a firm on the left from its liabilities and equity on the right. Treasury stock is an example of a contra equity account, meaning it is used to offset the total equity of a company. When a company buys back its own shares, these shares are referred to as treasury stock and appear as a reduction from the company's equity on the balance sheet. This is because the repurchased shares are no longer considered as part of the outstanding shares that can generate equity through their capital contribution.

Using the T-account as a reference, assets will always equal liabilities plus net worth (or stockholders' equity); thus, when a company buys treasury stock, it reduces its net worth because it's using assets (cash) to buy back shares, leading to a reduction in the equity section of the balance sheet.