Question

Dividend on Cumulative Preference Shares is given

• A. In the year of profit
• B. In the year of loss
• C. In the year of profit or loss
• D. None of these

Hint:

The key word is "Cumulative," which means "to accumulate." The dividend accumulates in years of loss/inadequate profit and is paid out in years of adequate profit. The actual disbursement always happens from profits.

Answer 1

The Correct Option is A

Step 1: Understanding the Question:
The question asks about the condition under which dividends are paid on cumulative preference shares.
Step 2: Key Concept:
Cumulative Preference Shares are a type of preference share where if a company is unable to pay the dividend in any particular year due to insufficient profits, the unpaid dividend gets accumulated. These accumulated dividends (called arrears of dividend) must be paid in future years when the company earns sufficient profits, before any dividend is paid to the equity shareholders.
Step 3: Detailed Explanation:
- A company can legally pay dividends only out of its profits. It cannot pay dividends out of its capital or in a year when it incurs a loss.
- Therefore, the actual payment of dividend, whether it is for the current year or accumulated from previous years, can only happen in a year when the company makes a profit.
- In a year of loss, the dividend is not paid; for cumulative shares, it is simply carried forward.
- Option (C) is incorrect because dividends are not given in a year of loss.
Step 4: Final Answer
The dividend on cumulative preference shares, including any past arrears, is given (paid) to shareholders in a year when the company earns a profit.