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Question 3Q

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Intermediate Accounting (Kieso)
Found in: Page 810

Short Answer

Distinguish between common and preferred stock

The dividend payment by a business to its shareholders can be measured as the biggest difference between the common and preferred stocks. For example, preferred shareholders receive the dividend before anyone else.

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Step by Step Solution

Meaning of Preferred Stock

Unlike common stock, preferred stock has certain rights that differ from common stock rights. Preferred stockholders usually receive higher dividend payments, and it has a higher claim on assets in case of company liquidation.

Difference between common and preferred stock

1. Conversion

It is possible to convert a fixed number of preferred shares into common shares, but common shares cannot be converted into preferred shares.

2. Company ownership

A stake in the company is owned by both common stock and preferred stock holders.

3. Returns

Shares of common stock will typically produce returns based on changes in share price, as well as an optional dividend. As opposed to preferred shares, dividends are mostly responsible for the return on the preferred shares.

4. Dividends

For common stock, dividends may vary based upon the company's profitability. However, both shareholders may receive dividends, but dividends are paid in different ways.

5. Claim to earn

The order in which investors are paid out depends on the earnings report.

Bondholders receive payment first, and common shareholders are paid out last. In addition to bondholders, preferred shareholders are paid out after bond shareholders but before common stockholders.

6. Voting Rights

Preferred shareholders are non-voting since they own no ownership in the company. Although both common and preferred investors own shares, only the common investors have voting rights.

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