Question

Read the following statements Assertion (A) and Reason (R). Choose the correct option from the given options.
Assertion (A) : Amount of Earnings is a major determinant of the decision about dividend.
Reason (R) : Dividends are paid out of current and past earnings.

• A. Both Assertion (A) and Reason (R) are true and Reason (R) is correct explanation of Assertion (A).
• B. Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
• C. Assertion (A) is true but Reason (R) is false.
• D. Assertion (A) is false but Reason (R) is true.

Hint:

Dividends come from profits—so no profit, no dividend. That’s why earnings directly determine dividend decisions.

Answer 1

The Correct Option is A

Company earnings capacity dictates dividend payouts. Greater earnings facilitate larger dividends, whereas diminished or negative earnings impose limitations.
Assertion (A) holds true as profits directly impact a company's dividend distribution capability. Reason (R) is also valid, as dividends are disbursed from profits, whether current or accumulated.
Furthermore, Reason (R) provides a logical explanation for Assertion (A): the quantum of dividends a company can distribute is capped by its profit accumulation (current or past). Consequently, earnings are not merely influential but essential.
Final Answer: (A) Both Assertion (A) and Reason (R) are true and Reason (R) is correct explanation of Assertion (A).