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A firm that sells inventory for more than its acquisition cost realizes an economic gain that accountants

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A firm that sells inventory for more than its acquisition cost realizes an economic gain that accountants include in net income, but a firm that sells treasury stock for more than its acquisition cost realizes an economic gain that accountants exclude from net income. What is the rationale for the difference in treatment of these economic gains?

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The managers of a firm have knowledge of the plans and risks of the firm tha...View the full answer


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Financial Accounting an introduction to concepts, methods and uses

Financial Accounting an introduction to concepts, methods and uses

ISBN: 978-0324789003

13th Edition

Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis

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Treasury stock refers to shares of a company\'s own stock that the company has bought back from its shareholders and now holds as a form of asset on its balance sheet. When a company buys back its own stock, it reduces the number of outstanding shares in the market, which can potentially increase the value of the remaining shares. Treasury stock can be acquired through a variety of methods, such as open market purchases, negotiated transactions, or as a result of converting convertible securities. Companies may buy back their own shares for a number of reasons, including to return capital to shareholders, to signal confidence in the company\'s future, or to use the shares for employee stock option plans. While treasury stock does not pay dividends, it can be reissued by the company at a later time, which could dilute the value of the remaining shares. Companies are required to report their treasury stock holdings in their financial statements.

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