Which statement describes treasury stock and its effect on equity?

• A. Treasury stock is the company’s own shares repurchased; it reduces total shareholders’ equity and is recorded as a contra-equity account.
• B. Treasury stock is new shares issued to raise capital; increases equity.
• C. Treasury stock is a liability that must be repaid.
• D. Treasury stock increases retained earnings.

Answer: (A)

Treasury stock represents the company’s own shares that it has repurchased. While held, these shares are not outstanding and do not carry voting rights or receive dividends. In accounting, treasury stock is recorded as a contra-equity account, which reduces total shareholders’ equity. The purchase uses cash, so the effect is to decrease assets and decrease equity by the same amount, keeping the accounting equation balanced. This is why the statement is correct: it accurately describes both the nature of treasury stock and its impact on equity. Treasury stock is not new shares issued to raise capital (that would increase equity), it is not a liability (it does not represent an obligation), and it does not increase retained earnings (retained earnings reflect past profits, not treasury stock transactions).