Preferred Shares

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University of Toronto Scarborough
Financial Accounting
Liang Chen

Preferred Shares Preferred shares have contractual provisions that give them a preference, or priority, over common shares in certain areas. Typically preferred shares have priority over dividends, and assets in the event of liquidation. They do not generally have voting rights. Like common shares, preferred shares may be issued for cash or for noncash assets. They can also be reacquired. Dividend Preference: corporate income is distributed to preferred shareholders before it goes to common shareholders. The first claim to dividends does not, however, guarantee the payment of dividends. Cumulative Dividend: means that preferred shareholders must be paid both current year dividends and any unpaid prior year dividends before common shareholders receive dividends. When preferred shares are cumulative, preferred dividends that are not declared in a given period are called dividends in arrears. Dividends in arrears are not considered a liability. No payment obligation exists until a dividend is declared by the board of directors. Convertible Preferred: shares give shareholders the opti
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