Advanced Financial Reporting Question And Answer

Question No 4:

Different types of preference shares

Answer: 

• Cumulative preference shares, for which dividends must be paid including skipped dividends i.e. if a dividend is skipped one year, the skipped dividend has to be paid the following year along with the 'normal' dividend.
• Non-cumulative preference shares, for which skipped dividends do not have to be paid later.
• Participating preference shares, which give the holder fixed dividends plus extra earnings based on certain conditions (in a similar way to ordinary shares).
• Convertible preference shares, which can be exchanged for a specified number of ordinary shares on some given future date.