Question

Read the following statements Assertion (A) and Reason (R). Choose the correct option from the given options.
Assertion (A) : Amount of Earnings is a major determinant of the decision about dividend.
Reason (R) : Dividends are paid out of current and past earnings.

• A. Both Assertion (A) and Reason (R) are true and Reason (R) is correct explanation of Assertion (A).
• B. Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
• C. Assertion (A) is true but Reason (R) is false.
• D. Assertion (A) is false but Reason (R) is true.

Hint:

Dividends come from profits—so no profit, no dividend. That’s why earnings directly determine dividend decisions.

Answer 1

The Correct Option is A

Dividend decisions are major financial decisions influenced by a company's earning capacity. Higher earnings generally enable higher dividends, while low or negative earnings restrict them.
Assertion (A) is true because earnings directly affect the company's ability to pay dividends. Reason (R) is also true because dividends are legally and practically distributed from profits — whether retained from the past or newly earned.
Also, Reason (R) logically explains Assertion (A): the amount of dividend that a firm can distribute is limited to the amount of profit it has earned (either current or accumulated). Hence, earnings are not just a determinant, they are a prerequisite.
Final Answer: (A) Both Assertion (A) and Reason (R) are true and Reason (R) is correct explanation of Assertion (A).