Stock buyback program is a program in which a corporation repurchases its own shares of common stock. The concept of repurchasing own stock is not new. However, the introduction of stock buyback programs has increased its importance, because it usually involves in repurchasing a large number of shares of common stock. The total shares repurchased by the corporation are known as treasury stock. The treasury stock purchased under a stock buyback program can by reissued any time by the corporation.
The impact on net income and paid-up capital
The purchase and sale of treasury stock has no effect on the net income of the corporation because it does not result in a gain or a loss.
If corporation opts to reissue its treasury stock, any difference between the purchase price and reissue price increases or decreases the paid up capital of the corporation. If the reissue price is more than the purchase price, paid up capital is increased by the amount representing the difference. If, on other hand, the reissue price is less than the purchase price, the paid capital is decreased by the amount representing the difference.
The impact on statement of cash flows
Because transactions relating to purchase of treasury stock are between corporation and its stockholders (a source of funds), they are classified as financing activities. All cash flows resulting from these transactions are reported in the financing activities section of statement of cash flows.
When shares are repurchased from stockholders, a financing cash outflow occurs and when they are reissued to investors, a financing cash inflow occurs.