Which of the following statements pertaining to preferred shares is correct?
A) If the preferred shares are non-cumulative, the current year's net income would be allocated to the preferred shares whether or not preferred dividends are declared.
B) If the preferred shares are non-cumulative, only the current year's net income would be allocated to preferred shares if preferred dividends are declared, since dividends are never in arrears with non-cumulative preferred shares.
C) If the preferred shares are cumulative, the current year's net income would be allocated to the shares, only if dividends are declared in the year.
D) There can never be any dividends in arrears when preferred shares are cumulative.

Question

Quizplus · Accepted Answer

If the preferred shares are non-cumulative, only the current year's net income would be allocated to preferred shares if preferred dividends are declared, since dividends are never in arrears with non-cumulative preferred shares. This means that if preferred dividends were not declared in a previous year, they cannot be accumulated or carried forward to the current year. The statement in option A is incorrect because if the preferred shares are non-cumulative, the current year's net income would not be allocated to the shares if preferred dividends were not declared. Option C is incorrect because if the preferred shares are cumulative, any unpaid dividends would accumulate and be carried forward to the next year. Option D is incorrect because even with cumulative preferred shares, dividends can sometimes be in arrears if the company is not performing well financially.

Which of the Following Statements Pertaining to Preferred Shares Is