Dividends and Accounts: Declaration of Dividend, Reserves, Accounts and Audit Basics Questions

Question 1

Define dividend.

Accepted Answer

Dividend is the portion of **distributable profits** distributed to shareholders as a return on investment (concept).

Question 2

What is an interim dividend?

Accepted Answer

Interim dividend is a dividend declared **during the financial year** between two annual general meetings (concept).

Question 3

What are reserves?

Accepted Answer

Reserves are portions of profits **retained** in the business instead of being distributed as dividend.

Question 4

State one purpose of audit.

Accepted Answer

Audit provides an independent check to ensure financial statements are reliable and show a **true and fair** view (concept).

Question 5

Dividend should not be paid out of capital. (True/False)

Accepted Answer

True. Dividend is a distribution of **profits**, not of capital (principle).

Question 6

What is a final dividend?

Accepted Answer

Final dividend is declared after year-end results/accounts and is approved in the general meeting based on recommendations (concept).

Question 7

Differentiate final dividend and interim dividend using a table (any three points).

Accepted Answer

Final vs interim dividend:

| Basis | **Final dividend** | **Interim dividend** |
|---|---|---|
| Timing | after year-end results | **during** the year |
| Basis | annual accounts/profit | interim performance/profit (concept) |
| Authority | shareholders approve (concept) | board declares (concept) |

Hence, final dividend is yearly; interim dividend is between two AGMs.

Question 8

State any three conceptual conditions for declaration of dividend.

Accepted Answer

Conceptual conditions (any three):

- dividend declared only out of **distributable profits** (current/accumulated as permitted)
- losses/depreciation should be considered before distribution (concept)
- dividend should not be paid out of **capital**
- proper approvals and documentation should exist

These ensure lawful and fair distribution.

Question 9

Explain why companies create reserves (any three points) using a small table.

Accepted Answer

Reasons for creating reserves:

| Reason | Explanation |
|---|---|
| **Stability** | strengthens financial position |
| Contingency | meets unforeseen losses/claims |
| Growth | finances expansion internally |
| Dividend policy | supports **steady dividend** |

Any three points can be written in exam answers.

Question 10

Differentiate revenue reserve and capital reserve (any three points) using a table.

Accepted Answer

Revenue reserve vs capital reserve:

| Basis | **Revenue reserve** | **Capital reserve** |
|---|---|---|
| Source | operating profits | capital profits (non-operating) |
| Use (concept) | can support dividend (as permitted) | generally not for dividend (concept) |
| Example | general reserve | profit on sale of fixed asset (concept) |

Thus, revenue reserves arise from operations; capital reserves arise from capital gains.

Question 11

Explain dividend declaration workflow (exam-style) with a flowchart and brief points.

Accepted Answer

### Flowchart
Profits from accounts → Board considers distributable profit → Board recommends/declares (interim) → Shareholders approve final dividend (concept) → Dividend recorded and paid → Disclosures in accounts

### Brief points
- Dividend is linked to **profits**, not capital.
- Proper approvals and documentation ensure validity.
- Payment and disclosure create an audit trail.

### Conclusion
A structured workflow ensures lawful and transparent profit distribution to shareholders.

Question 12

Explain reserves: meaning, objectives and types (exam-style) with a table and conclusion.

Accepted Answer

### Meaning
Reserves are profits **retained** in the business.

### Objectives
- financial **stability**
- contingency coverage
- internal financing for growth

### Types (table)
| Type | Source | Example |
|---|---|---|
| **Revenue reserve** | operating profits | general reserve |
| **Capital reserve** | capital profits | capital profit (concept) |
| Specific reserve | set aside for a purpose | dividend equalisation (concept) |

### Conclusion
Reserves strengthen the company and support long-term sustainability while balancing dividend expectations.

Question 13

Explain audit: meaning, need and audit process (exam-style) with a flowchart and conclusion.

Accepted Answer

### Meaning
Audit is an independent examination of accounts to express an opinion on **true and fair** presentation (concept).

### Need
- protects shareholders and creditors
- improves reliability of accounts
- supports compliance and transparency

### Audit process (flow)
Appointment/engagement → Planning → Control review → Evidence collection → Verification → Audit report

### Conclusion
Audit builds trust in company accounts and supports good corporate governance.

Question 14

Write a short note on basic company financial statements and their importance for dividend and audit (exam-style) using a table.

Accepted Answer

Basic financial statements and why they matter:

| Statement | Shows | Why important |
|---|---|---|
| Profit & loss | **profit** earned | basis for dividend (concept) |
| Balance sheet | financial position | solvency and reserves assessment |
| Notes/disclosures | details and policies | supports audit evidence |

Thus, accounts are the base for computing profits and for independent verification.

Question 15

Prepare a combined flowchart linking accounts, reserves, dividend and audit (exam-style) and explain briefly.

Accepted Answer

Combined flow:

Accounts prepared → **Profit** determined → Reserve appropriations → Dividend decision → Payment & disclosure → Audit verifies and reports

Briefly, accounts determine profits, reserves strengthen stability, dividends distribute lawful profits, and audit provides independent assurance.

Basis	Final dividend	Interim dividend
Timing	after year-end results	during the year
Basis	annual accounts/profit	interim performance/profit (concept)
Authority	shareholders approve (concept)	board declares (concept)

Dividends and Accounts: Declaration of Dividend, Reserves, Accounts and Audit Basics

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