Question

5)  What accounting term is used to describe stock temporarily repurchased by a corporation?  Under the stimulus act why do you think corporations are not allowed to use recovery money to repurchase their own stock?  Do you agree with this restriction?  Why or why not?  If corporations repurchase their own stock, which of the 3 categories of financial ratios (liquidity, solvency, profitability),would be affected?  Indicate whether the category or categories would improve or deteriorate identifying which ratios within each of the categories identified would be most affected.   

Answer 1

Buyback is the accounting term used to describe the repurchase of stock.

There are restrictions for a company for the utilisation of funds for buyback because, companies may mis utilise the provision for the benefit of some group of people. Buyback will result in the transfer of risk and also a change in debt equity ratio. This is the reason for the restrictions.

The solvency ratio which is the most important for creditors and other lenders, will be affected because of the buyback.