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What is the key difference between cumulative and non-cumulative preference shares?
ACumulative shares carry a fixed par value; non-cumulative shares carry no par
BCumulative shares accumulate missed dividends as arrears; non-cumulative shares do not
CCumulative shares rank below ordinary shares; non-cumulative shares rank above
DCumulative shares pay dividends in shares; non-cumulative shares pay cash
Answer & Solution
Correct answer: B. Cumulative shares accumulate missed dividends as arrears; non-cumulative shares do not
1. Both classes are paid before ordinary shareholders in any given year.
2. For non-cumulative shares, an unpaid amount in a lean year is simply lost.
3. For cumulative shares, unpaid amounts build up as dividends in arrears.
4. Those arrears must be cleared before ordinary shareholders receive anything later.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §6.9 "Cash Dividends Calculations", p.258_