When analyzing a balance sheet, you're apt to run across an entry under Shareholder Equity called "Treasury Stock". This refers to the shares a company has issued and somehow reacquired either through share repurchase programs or donations.
Companies sometimes buy back their shares for a variety of reasons. In most cases, it is a sign management believes the stock is undervalued. Depending upon its objectives, a company can either retire the shares it purchases, or hold them with the intention of reselling them to raise cash when the stock price rises.
When a corporation purchases its own stock, the cash on hand is reduced. This lowers the total shareholder equity. In order for investors to know the reduced cash and equity was a result of share repurchases and not debt or losses, management puts the cost of the reacquired stock under "Treasury Stock" in order to clarify. This is why you will often see a negative number besides the treasury stock entry. (You may be wondering why the current market price of the company's treasury stock isn't listed as an asset since the shares can be sold at any time to raise cash. There is a debate about this in the accounting world. The premise is that all unissued stock can also be sold for cash yet it isn't listed as an assets - treasury stock should be treated the same way.)
Many states limit the amount of treasury stock a corporation can own at any given time since it is way of taking resources out of the business by the owners / shareholders, which in turn, may jeopardize the legal rights of the creditors.
Treasury Stock Not Permitted In Some StatesSome states don't allow companies to carry treasury stock on the balance sheet, instead requiring them to retire shares.
This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.