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Treasury Stock (Treasury Shares) | Definition | Methods - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
wallstreetmojo
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friends today we have a topic to learn
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which is Treasury stock that's treasury
shares well let's get started on this
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particular topic as you can see there's
an extract over here from the balance
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sheet the shareholders equity and well
we have couple of our details on the
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Paid in capital retain earnings are
committed and other comprehensive income
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and we also have something that's called
Treasury stock at cost so what exactly
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this is let's understand this see
Treasury stock is basically it's the
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stock that has been what we call as the
reacquired it has been reacquired by the
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issuing company from the shareholders
but you know they are not yet retired by
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the company so Treasury stock basically
reduces what does it do it reduces the
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shareholders equity reduces the
shareholders it or the treasury shares
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day does not represent an investment in
the firm it does not represent
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absolutely is not represent as an investment in the firm's and also it does not
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receive a dividend
and have you know basically no voting
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rights also in this particular scenario
so the treasury shares are not taken
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into account for calculating dividend
EPS now let's understand the Treasury
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stock in the balance sheet the Treasury
stock is companies what we call as the
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own stock that has been reacquired by
the issuing form so the treasury shares
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is usually that has been reported at the
end of the line item it is reported at
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the end of the light at line items
within the equity section when the
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company repurchases when the company
re-purchases the stock the expenditure due
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to repurchase is recorded on the what we
call as the contra equity account okay
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so the direct effect of writing a
Treasury stock transaction is basically
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you can see it at reduction it is known as
what it is reduction in the number of
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those number of shares so in this two
methods of accounting Treasury stock our
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cost method and par value method two
methods now in the cost method of
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accounting Treasury the stocks are what
we call as the paid in capital in
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capital is reduced in the balance sheet
when Treasury stock is purchased and
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under the par value method what
exactly happens that during the Repurchase
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just the book value sorry the books will
record it as a retirement of shares you
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can say that there by no the common
stock has been debited and the Treasury
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stock is basically what we call as
credit but in both the methods the
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transaction related to the Treasury
stock cannot be cannot basically
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increase the amount of the Retained
earnings it cannot increase the amount
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of the retained so the Treasury stock
example of I know I'm going to show Colgate
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it you know shows how treasury
shares impact the shareholders equity of
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the company now this is the example of
Treasury stock which
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this is the example of the Treasury
stock at cost
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you know how exactly does it impact and
what we try and notice if we see
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something over here over here the
shareholders equity is reduced by the
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the Treasury stock or the Treasury our
shares over here is a negative number as
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you can see this company Palmolive Colgate you know the they try and implement what
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we call as the cost method of to account
for the Treasury stock and closely to
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19.135 billion
worth of Treasury stock as on December
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2016 now let's take us some examples to
understand this in a detail format let's
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assume that you know there's a company
called a ABC it takes a decision let's
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say to reacquire it takes a decision to
reacquire some of its shares since the
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share of the ABC are currently let's say
undervalued in the open market so when a
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company ABC buys the shares back then
they become what we call as the Treasury
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stock the TS and it must keep in mind
that if company ABC decides to resell
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accounting or Treasury stock in the
profit or the losses on the accounting
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Treasury stock transactions are not at
all recognized it is not at all
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recognized in the income statement of
the company now suppose let's say the
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ABC has excess cash and it sees that you
know it's it's stock in market is
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trading below the intrinsic value so
basically we it decides to buy back
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let's say a 1000 shares of its stock at
$60 for the total value that that is
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$60,000 1000 x 60 for a total value
of 60,000 so the total sum of the
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company's equity account including the
common stock and the retained earning is
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going to be 1,20,000 so this
repurchase of the stock leads to
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Treasury stock contra account following
which you know 60,000 accounting
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Treasury stock repurchase is deducted
from 1,20,000 right from the
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equity account and the balance does
leaving her 60,000 in the similar
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man so the cash account on the asset
side of the balance sheet is also
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decreased to the extent of 60,000 well
this was a particular thing regarding
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Treasury stock which I didn't understand
with the help of an example here but
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we'll see some of the difference between
the Treasury stock and outstanding stock
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what are some of the differences well
Treasury stocks have no voting rights
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they have no voting rights the
outstanding has voting rights they had
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they due voting rights treasury
shares do not receive any dividend no
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dividend and overhear yes
dividends right all the shareholders of the
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other outstanding shares they receive
the dividend so the treasury shares they
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are not included in the calculation
outstanding shares and over here they
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are included they are included in the
calculation of outstanding shares forth
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the treasury shares over here
they cannot exercise any privilege
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privilege rights what we call us as
shareholders in over here they can
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exercise such privilege privilege rights
as a shareholder well so that's it for
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this particular topic if you have
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