ACCA Advanced Financial Management (AFM) Practice Exam

What is the main purpose of the record date in dividend distribution?

1. To track how many shares are outstanding

2. To identify which stockholders will receive dividends

3. To determine the payment method

4. To establish future stock prices

The correct answer is: To identify which stockholders will receive dividends

The main purpose of the record date in dividend distribution is to identify which stockholders will receive dividends. The record date is set by the company’s board of directors and marks the cutoff point for shareholders who will be entitled to receive the declared dividend. Stockholders who are on the company's books as of this date will receive the dividends, regardless of any transactions that happen after that date. This ensures that the company can accurately distribute dividends only to those who are officially recognized as shareholders at the time the dividend is declared, making it a critical date for dividend declarations. The other options do not accurately reflect the primary purpose of the record date. For instance, while it’s important to know how many shares are outstanding, tracking outstanding shares is a separate function and does not directly relate to the record date's role in dividend distribution. Similarly, determining the payment method or establishing future stock prices are not functions of the record date; these concerns lie within broader corporate finance management and market dynamics.