Question

State, with reasons, whether the following statements are True or False 

No dividend can be declared without making provisions for reserve and depreciation. 

Answer 1

True

Reasons: (1) Dividend is the return on share capital from the distributable profits of the company.

(2) Based on the rate of proposed dividend company is required to transfer a certain percentage to reserves as specified.

(3) E.g. Dividend of more than 20% of paid up capital entails a minimum of 10% of net profits to be transferred to reserves.

(4) Company may decide to transfer more than the stipulated rates voluntarily.

(5)Also, depreciation has to be provided for / from current / previous years profits.

These provisions help the company to become financially sound and solid.