Cumulative Preference Shares and Dividend Arrears

Steps:

• Identify the key feature: fixed annual dividend with unpaid amounts carried forward to future profits.
• Recall preference shares provide priority dividends over ordinary shares.
• Differentiate cumulative from non-cumulative: cumulative ensures arrears are paid before other dividends.
• Match to options: only cumulative preference shares fit this description exactly.

Why A is correct:

• Cumulative preference shares guarantee fixed dividends, with any arrears accumulated and paid from future profits before ordinary shareholders receive dividends, per company law definitions.

Why the others are wrong:

• B. Debentures are debt instruments offering fixed interest, not dividends, and are not shares.
• C. Ordinary shares have variable dividends based on profits, with no fixed entitlement or arrears carryover.
• D. Participating preference shares allow extra dividends if profits exceed a threshold, but arrears are not necessarily cumulative unless specified.

Final answer: A