Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Retained Earnings

Financial Accounting

12. Stockholders' Equity

Retained Earnings

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Multiple Choice

Why would a corporation purchase its own stock (treasury stock) on the open market?

To increase earnings per share by reducing the number of shares outstanding

To increase the company's retained earnings directly

To distribute additional dividends to shareholders immediately

To decrease the company's total assets permanently

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Verified step by step guidance

Understand the concept of treasury stock: Treasury stock refers to shares that a corporation has repurchased from the open market. These shares are held by the corporation and are not considered outstanding shares, meaning they do not have voting rights or receive dividends.

Analyze the impact of repurchasing shares on earnings per share (EPS): When a corporation buys back its own stock, the number of outstanding shares decreases. Since EPS is calculated as \( \text{EPS} = \frac{\text{Net Income}}{\text{Outstanding Shares}} \), reducing the denominator (outstanding shares) increases the EPS, assuming net income remains constant.

Evaluate the statement about retained earnings: Repurchasing treasury stock does not directly increase retained earnings. In fact, the purchase of treasury stock reduces the corporation's cash (an asset), which is recorded as a reduction in equity under the treasury stock account.

Consider the statement about dividends: Treasury stock does not lead to immediate distribution of additional dividends to shareholders. Instead, it reduces the number of shares eligible for dividends, potentially increasing the dividend per share for remaining shareholders.

Assess the statement about total assets: When a corporation repurchases its own stock, it uses cash (an asset) to buy the shares. This decreases the company's total assets, but this reduction is not necessarily permanent, as the corporation may reissue the treasury stock in the future.