CFA CFA Level 1 Why Does Acquiring Treasury Stock Reduce Owner’s Equity?

Why Does Acquiring Treasury Stock Reduce Owner’s Equity?

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    • shannondaily
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        Wouldn’t it increase owner’s equity, because the dividends aren’t paid to the treasury stock? Thus, more earnings are potentially/eventually spread amongst less shares.

      • ufsguy
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          Treasury stock is a contra-account, posted against Capital Stock and Additional Paid In Capital.

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          @shannondaily‌ 
          lol
          also, regarding your dividends paid part, dividends paid amount would be less than the price of the equity…

        • shannondaily
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            Found the answer on Investopedia, but couldn’t find it in the Schweser Notes. I feel a little silly. I was totally overthinking it. :blush: 

            “Though investors may benefit from a share price increase, adding treasury stock will – at least in the short-term – actually weaken the company’s balance sheet. To grasp why this is the case, consider the basic accounting equation: Assets – Liabilities = Stockholder’s Equity. The organization has to pay for its own stock with an asset (cash), thereby reducing its equity by an equivalent amount.”

            http://www.investopedia.com/articles/markets/013014/getting-acquainted-treasury-stock.asp

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