Definition of Cumulative Preferred Stock
Cumulative preferred stock is a type of preferred stock for which any omitted dividends must be paid before the corporation is allowed to pay a dividend on its shares of common stock.
Typically, the corporation's board of directors will not declare a dividend they will be omitting. Therefore, the amount of these past omitted dividends that remain unpaid must be disclosed in the notes to the financial statements. The past omitted dividends on the cumulative preferred stock are referred to as dividends in arrears.
Examples of Cumulative Preferred Stock
Assume that a corporation has issued and outstanding 10,000 shares of 6% cumulative preferred stock with a par value of $100. This means that the corporation must declare and pay $60,000 ($6 per share X 10,000 shares) in dividends to its cumulative preferred stockholders before the corporation can pay any dividend to its common stockholders.
If the corporation declares and pays only $25,000 in dividends to the cumulative preferred stockholders, the corporation will have $35,000 ($60,000 minus $25,000) of dividends in arrears that must be disclosed in the notes to the financial statements.