When do preferred stockholders become entitled to cumulative and participating dividends?

Preferred stockholders are entitled to cumulative and participating dividends when the board of directors declares dividends. This is an essential aspect of preferred stock characteristics.

In the case of cumulative dividends, if the board has not declared dividends in previous years, preferred shareholders are entitled to receive those unpaid dividends before any dividends are paid to common shareholders. For participating dividends, this allows preferred shareholders to receive additional dividends beyond their fixed rate under certain circumstances.

The declaration of dividends is a critical action taken by the board, signifying the corporation's decision to distribute profits to shareholders, which subsequently activates the rights of preferred shareholders to these dividends. Other factors listed in the options, such as net profit recognition or the financial position of assets and liabilities, do not themselves create the obligation to pay dividends; the formal declaration by the board is what establishes that payment obligation.