A company acquires its own stock to hold as treasury stock. If the company prepares the statement of cash flows using the indirect method or the direct method, where would this transaction appear?
A)The acquisition of treasury stock would be presented in the operating activities section as a reduction in net income under the indirect method and as a cash payment under the direct method.
B)The acquisition of treasury stock would be presented in the non-cash investing and financing activities section under both methods.
C)The acquisition of treasury stock would be presented in the financing activities section as a cash payment under both methods.
D)The acquisition of treasury stock would be presented in the investing activities section as a cash payment under both methods.

Question

Quizplus · Accepted Answer

The acquisition of treasury stock represents a financing activity, as it involves the use of cash to buy back the company's own shares. Therefore, under both the indirect method and the direct method, this transaction should be presented in the financing activities section of the statement of cash flows as a cash outflow. Option A is incorrect because the acquisition of treasury stock is not a reduction in net income but rather a decrease in cash outflows. Option B is incorrect because treasury stock purchase involves the use of cash, and therefore, is not a non-cash transaction. Option D is incorrect because treasury stock purchase is not an investing activity, which generally refers to the purchase or sale of long-term assets or investments.

A Company Acquires Its Own Stock to Hold as Treasury