Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Times Interest Earned (TIE)

Financial Accounting

14. Financial Statement Analysis

Ratios: Times Interest Earned (TIE)

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Multiple Choice

What effect will issuing more bonds typically have on the Times Interest Earned (TIE) ratio over time, assuming operating income remains constant?

The TIE ratio will increase because operating income increases.

The TIE ratio will decrease because interest expense increases.

The TIE ratio will remain unchanged because bonds do not affect interest expense.

The TIE ratio will increase because interest expense decreases.

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Verified step by step guidance

Understand the Times Interest Earned (TIE) ratio formula: TIE = Operating Income / Interest Expense. This ratio measures a company's ability to cover its interest obligations with its operating income.

Analyze the impact of issuing more bonds: When a company issues more bonds, it typically incurs additional interest expense because bonds require periodic interest payments to bondholders.

Consider the assumption that operating income remains constant: Since operating income does not change, the numerator of the TIE ratio remains the same.

Evaluate the effect of increased interest expense: As interest expense increases due to the issuance of more bonds, the denominator of the TIE ratio increases, leading to a decrease in the overall TIE ratio.

Conclude that the TIE ratio will decrease over time if operating income remains constant and interest expense increases due to issuing more bonds.