Will The Income Statement Include Profits Or Losses From

Will the income statement include the profits or losses from the purchase and sale of treasury stock

Determine whether the income statement records profits or losses resulting from transactions involving treasury stock, and include an example of a journal entry to purchase treasury stock.

Paper For Above instruction

The income statement, also known as the profit and loss statement, primarily reports a company's revenues, expenses, gains, and losses over a specific period. Its primary purpose is to demonstrate the company’s profitability during that timeframe. When it comes to treasury stock transactions, however, such activities are generally not reflected on the income statement. In this discussion, I will clarify whether profits or losses from the purchase and sale of treasury stock are included in the income statement, and I will provide an example of the journal entry for purchasing treasury stock.

Typically, profits or losses from the purchase and sale of treasury stock are not recorded on the income statement. Treasury stock refers to shares that a company has issued and subsequently reacquired from shareholders. These shares are held in the company's treasury and are not considered outstanding shares. Since the reacquisition of treasury stock does not directly impact the net income, activities related to buying and selling treasury stock are recorded directly within shareholders’ equity. As a result, gains or losses from treasury stock are excluded from the calculation of net income on the income statement.

Instead, any gains or losses resulting from the resale of treasury stock are reported within the equity section, often under "Paid-in Capital—Treasury Stock" or "Retained Earnings" depending on the circumstances. This approach aligns with generally accepted accounting principles (GAAP), which stipulate that transactions involving treasury stock are equity transactions and do not affect net income unless the stock is retired, in which case the excess of the cost over par value impacts additional paid-in capital or retained earnings.

For example, when a company purchases treasury stock, it makes a journal entry that debits treasury stock and credits cash. If the stock is later resold at a different price, the company records a gain or loss, which affects the equity account, not the income statement.

Here is an example of a journal entry for the purchase of treasury stock:

Dr. Treasury Stock ..................................... $10,000


Cr. Cash ............................................. $10,000

This entry records the company's repurchase of shares for $10,000. If the company later resells the treasury stock for more or less than the repurchase price, the difference impacts the equity accounts directly and is not reflected as a profit or loss on the income statement.

In conclusion, profits or losses from the purchase and sale of treasury stock are not included in the income statement. Instead, they are recorded within equity accounts in the balance sheet. This treatment reflects the nature of treasury stock transactions as equity transactions rather than operational or investing activities that influence net income.

References

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  • Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
  • FASB Accounting Standards Codification. (2022). ASC 320 — Investments—Debt and Equity Securities.
  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
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  • CPA Canada. (2014). Handbook—Part I — Accounting Standards for Private Enterprises. Canadian Institute of Chartered Accountants.
  • International Financial Reporting Standards (IFRS). (2023). IAS 32 — Financial Instruments: Presentation.
  • McLaney, E., & Atrill, P. (2019). Financial Accounting and Reporting. Pearson Education.
  • U.S. Securities and Exchange Commission. (2023). Financial Reporting Manual, Section 2500.

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