Which statement about cumulative preference shares is correct?

Which statement about cumulative preference shares is correct?

• A. A cumulative preference share pays dividends arrears from previous years if none were allocated
• B. A cumulative share has voting rights
• C. A cumulative share never pays out when profits are low
• D. A cumulative preference share pays dividends only in profitable years

Answer: (A)

Cumulative preference shares ensure that any dividends not declared in a given year accumulate as arrears and must be paid in the future before ordinary shareholders receive any dividend. This means the statement that they pay dividends arrears from previous years if none were allocated is the accurate description. The other points don’t fit: these shares typically have no voting rights; they do not guarantee payments in all years—if profits are low, dividends can be skipped, but the unpaid amounts accumulate to be paid later; and they are not limited to profitable years—arrears can be settled once profits permit.

Cumulative preference shares ensure that any dividends not declared in a given year accumulate as arrears and must be paid in the future before ordinary shareholders receive any dividend. This means the statement that they pay dividends arrears from previous years if none were allocated is the accurate description. The other points don’t fit: these shares typically have no voting rights; they do not guarantee payments in all years—if profits are low, dividends can be skipped, but the unpaid amounts accumulate to be paid later; and they are not limited to profitable years—arrears can be settled once profits permit.