What happens when a company buys back its own stock, also known as treasury stock?

When a company buys back its own stock, often referred to as treasury stock, it decreases stockholders' equity because the company is essentially utilizing its cash to purchase its own shares, which reduces the total amount of equity available to shareholders. The cash used for this purchase also decreases as the company spends money to acquire these shares.

This transaction does not contribute to an asset increase; instead, it reduces the company's cash balance while simultaneously affecting the equity section of the balance sheet. The shares purchased as treasury stock are accounted for as a reduction in total stockholders’ equity. Thus, the cash outflow to buy back shares results in a direct decrease in total stockholders' equity alongside a decrease in cash, reflecting the financial maneuver's impact on the company's balance sheet.

Other options reflect incorrect relationships between equity, cash, assets, and liabilities in the context of stock buybacks. For example, stockholders' equity cannot increase when treasury stock is acquired, nor can assets or liabilities increase simply due to the buyback of shares since it essentially represents a reallocation of capital within the company rather than an operational increase in assets or an obligation to pay liabilities.