Which of the following statements about the declaration of cumulative dividends is correct?

Cumulative dividends refer to dividends on preferred shares that accumulate if they are not paid in a given year. This means that if a company does not declare dividends in a particular year, those dividends will accrue and must be paid before any dividends can be distributed to ordinary shareholders in future years.

When the statement indicates that cumulative dividends are paid when profits are available for that purpose, it underscores the fundamental principle that dividends, including cumulative ones, are only distributed when the company has sufficient profits. A company must have earned or accumulated profits in order to declare and pay dividends, whether cumulative or otherwise. This ensures that the organization remains financially stable while honoring its obligations to shareholders.

This concept is crucial for understanding corporate finance and shareholder agreements, as it aligns with the financial health of the businesses and protects against the irresponsible distribution of funds that could jeopardize future operations.

The other options do not accurately reflect how cumulative dividends function. For instance, suggesting they are not paid until profits reach a certain percentage does not correctly capture the necessity of having profits available for dividend payments. Similarly, cumulative dividends are not distributed as a bonus issue or paid out of capital; rather, they should typically come from realized profits.