DEFINITION of 'Treasury Stock Method'
The component of the diluted earnings per share denominator that includes the net of new shares potentially created by unexercised inthemoney warrants and options. This method assumes that the proceeds that a company receives from an inthemoney option exercise are used to repurchase common shares in the market.
In order to comply with generally accepted accounting principles (GAAP), the treasury stock method must be used by a company when computing its diluted earnings per share (EPS).
INVESTOPEDIA EXPLAINS 'Treasury Stock Method'
The net of new shares that are potentially created is calculated by taking the number of shares that the inthemoney options purchase, then subtracting the number of common shares that the company can purchase from the market with the option proceeds. This adds to the total number of shares in the denominator and lowers the EPS number.
For example, assume that a company currently has inthemoney options that cover 10,000 shares with an exercise price of $50. If the current market price is $100, the options are inthemoney and, based on the treasury method, need to be added to the diluted EPS denominator. The proceeds the company will receive will be $500,000 ($50 x 10,000), which allows them to repurchase 5,000 shares on the market ($500,000/$100). Therefore, the net of new shares is 5,000 (10,000 option shares  5,000 repurchased shares).

Earnings Per Share  EPS
The portion of a company's profit allocated to each outstanding ... 
Diluted Earnings Per Share  Diluted ...
A performance metric used to gauge the quality of a company's ... 
Option
A financial derivative that represents a contract sold by one ... 
Exercise Price
The price at which the underlying security can be purchased (call ... 
Generally Accepted Accounting Principles ...
The common set of accounting principles, standards and procedures ... 
Warrant
A derivative security that gives the holder the right to purchase ...

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