Comprehensive Guide to Preferred and Treasury Stock Concepts in Corporate Finance

Preferred Stock

Stock that has special rights over common stock, usually related to dividends and liquidation.

Preferred Stockholders' Priority

Preferred stockholders have priority over common stockholders for dividends and liquidation assets.

Dividend Priority

Preferred stockholders receive dividends before common stockholders.

Liquidation Priority

In liquidation, preferred stockholders are paid before common stockholders after liabilities are settled.

Voting Rights (Preferred Stock)

Preferred stockholders usually do not have voting rights unless specified otherwise.

Common Stock

Represents basic ownership in a corporation and usually carries voting rights but has lower priority for dividends and liquidation.

Treasury Stock

A corporation's own stock that has been repurchased and is held by the company.

Reason for Treasury Stock Repurchase

Corporations repurchase stock to reissue shares to employees, reduce shares outstanding, or support stock price.

Purchase of Treasury Stock

The corporation buys back its own shares, reducing stockholders' equity.

Treasury Stock Accounting Method

Companies generally use the cost method to account for treasury stock.

Cost Method (Treasury Stock)

Treasury stock is recorded at the cost paid to repurchase the shares.

Treasury Stock Classification

Treasury stock is a contra stockholders' equity account.

Contra Stockholders' Equity Account

An account that reduces total stockholders' equity.

Effect of Treasury Stock on Equity

Treasury stock reduces paid-in capital, retained earnings, and total stockholders' equity.

Treasury Stock Is Not an Asset

Treasury stock is not an asset because a company cannot own itself.

Sale of Treasury Stock

When treasury stock is reissued, the company does not recognize a gain or loss.

No Gain on Treasury Stock

A company can never record a gain from selling its own stock.

Paid-in Capital from Treasury Stock

If treasury stock is reissued above cost, the excess is credited to paid-in capital, not revenue.

Credit to Paid-in Capital

The excess received from selling treasury stock above cost is credited to paid-in capital.

Treasury Stock Voting Rights

Treasury stock has no voting rights.

Treasury Stock Dividends

Treasury stock does not receive dividends.