Dividends in Arrears: What You Need to Know

What are dividends in arrears?

Dividends in arrears refer to the total cumulative dividends owed to shareholders that have not been paid by a company. Can you explain more about this concept?

Answer:

Dividends in arrears are an important concept in the world of finance and business. Let's dive into it further.

Understanding Dividends in Arrears

Dividends in arrears are cumulative dividends that a company owes to its shareholders but has not yet paid. In the case of Apex Co., they had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding at the end of year 2 and year 3.

When a company fails to pay out dividends to its preferred shareholders, those unpaid dividends accumulate as dividends in arrears. This accumulated amount must be paid before any dividends can be distributed to common stockholders.

For Apex Co., as of December 31, year 1, no dividends were in arrears. However, during year 3, Apex paid a cash dividend of $10,000 on its preferred stock, indicating that dividends were now in arrears for that fiscal year. These dividends in arrears would need to be reported in the financial statements.

Reporting dividends in arrears as a reduction of retained earnings on the December 31, Year 3, balance sheet is a common practice to accurately reflect the company's financial position.

In conclusion, dividends in arrears represent the past cumulative dividends that a company owes to its preferred shareholders but has not paid. It is an important financial metric to track and report in financial statements.