Treasury stock method
Financial Accounting glossary · Stockholders' Equity
Definition
Mechanic for computing diluted EPS: assume option exercise + proceeds repurchase shares at average market price; net new shares are dilutive.
Treasury stock method in plain English
Some employees hold stock options — the right to buy shares later at a fixed, usually cheap price — and those could someday turn into extra shares that split the company's profit among more people (that's 'dilution'). Diluted EPS (earnings per share) tries to show the worst-case, more-mouths-to-feed profit-per-share, and the treasury stock method is the fair way to estimate the extra shares. It pretends everyone exercises their options, then pretends the company takes that incoming cash and buys back as many shares as it can at the average market price — so only the leftover NEW shares actually count as dilution. It's like assuming your roommates all move in, but their rent money lets you rent extra space back, so the pizza only gets split a little thinner, not a lot.
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