Treasury Stock on Statement of Cash Flow
Treasury Stock
Treasury Stock or Treasury Share is the stock/share which is repurchased by the issuing company. The company issue share to the market and later on buy them back, they are the treasury stock. It will decrease the outstanding number of shares in the market. Treasury Stock will decrease the share equity balance, so it will present as the contra account in the equity account on balance sheet.
When issuing the stock to the capital market, the company will receive cash and for sure it will impact the cash flow statement. The cash inflow from the issuing of new share fall under financing activities. It will increase the cash flow during the period.
Similar to the share issue, treasury share will impact the cash flow from financing activities. When the company buyback the share, they need to pay cash to the investors. So it will make cash outflow from the company.
Treasury Stock Example
On 01 January 202X, Company ABC issues 100,000 shares to the market at $ 10 per share. The company can raise capital $ 1,000,000 to expand the business. After the issue, ABC company has $ 10 Million of total share capital.
5 years later, after a huge boom in profit, top management decides to buy back some outstanding shares to gain more control. They buyback 200,000 shares at $ 10 per share.
- On 01 Jan 202X, when the company issues share capital, they need to make a journal entry by debiting cash and credit share capital which include common stock and additional paid-in capital. Common stock is the par value multiplied by the number of share issues. Additional paid-in capital is the amount that investors pay higher than the par value.
The journal entry is debiting cash $ 10,000,000 and credit common stock $ 1,000,000 & additional paid in capital $ 9,000,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 10,000,000 | |
| Common Stock | 1,000,000 | |
| Additional paid-in capital | 9,000,000 |
Both common stock and additional paid-in capital will be present in the equity on the balance sheet. Cash will be present on the balance sheet.
After the issuing of new shares, company needs to record both equity items into the balance sheet. Here is the part of ABC balance sheet after issuing a new share on 01 Jan 202X:
| Partial Balance Sheet (Equity Section) | |
| Common Stock | 1,000,000 |
| Additional paid-in capital | 9,000,000 |
| Retained Earnings | XXXX |
| Total Equity | XXXX |
- 5 years later, the company decide to purchase back the share to get back some ownership from the investors. They 200,000 shares at $ 10 per share. The company needs to spend 2 million dollars to buy back the shares. The cash outflow will show in the cash flow statement in investing activities. They need to record the following journal by debiting treasury stock and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Treasury Stock | 2,000,000 | |
| Cash | 2,000,000 |
Treasury stock is the equity component on balance sheet. It is present on the debit side so it will reduce the equity section.
- The impact of the share buyback on the balance sheet.
| Partial Balance Sheet (Equity Section) | |
| Common Stock | 1,000,000 |
| Retained Earnings | 9,000,000 |
| Treasury Stock | (2,000,000) |
| Total Equity | 8,000,000 |
Treasury Stock on Statement Cash Flow
The purchase of treasury stock is the transaction that causes cash flow out of the company. The company needs to spend cash to acquire its own shares back.
The issuing of a new share, it will show as cash flow in. On the other hand, the repurchase will show as cash outflow. Both transactions will present under financing activities of the company cash flow statement.
| Partial Cash Flow Statement (Financing Activity) | |
| Repayment of loan | XXXX |
| Issuing bonds | XXXX |
| Purchase of Treasury Stock | (2,000,000) |
| Total Cash Flow from Investing Activities | XXXX |
