Capital Stock Reduction

E

Only the purchase of treasury stock would cause a firm's capital stock account to decrease because the firm acquires outstanding shares and immediately retires these shares.

The correct answer is E. The purchase of treasury stock.

Here's a detailed explanation of each answer choice:

A. The exercise of warrants: The exercise of warrants refers to the conversion of warrants into common stock. When warrants are exercised, new shares are issued, which increases the outstanding capital stock. Therefore, this option does not decrease the outstanding capital stock.

B. All of these answers: This option implies that all the given options could decrease outstanding capital stock. However, this is incorrect because there is an answer choice that does not decrease outstanding capital stock, which is C. the retention of earnings.

C. The retention of earnings: Retention of earnings refers to the practice of a company retaining a portion of its profits instead of distributing them to shareholders as dividends. Retained earnings are not used to decrease the outstanding capital stock directly. Instead, they are typically reinvested in the company's operations or used for various purposes such as debt repayment, research and development, or acquisitions. Therefore, this option does not decrease the outstanding capital stock.

D. The payment of a cash dividend: When a company pays cash dividends to its shareholders, it distributes a portion of its earnings to them. However, the payment of cash dividends does not decrease the outstanding capital stock. It simply transfers funds from the company to the shareholders, but the number of shares remains the same.

E. The purchase of treasury stock: Treasury stock refers to shares of a company's own stock that it has repurchased from the shareholders. When a company buys back its own shares, it reduces the number of outstanding shares, thereby decreasing the outstanding capital stock. The repurchased shares are held as treasury stock, which means they are no longer considered outstanding and do not have voting rights or receive dividends.

In conclusion, the only option among the given choices that could decrease outstanding capital stock is E. The purchase of treasury stock.