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)

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

Which of the following formulas is used to compute the Times Interest Earned (TIE) ratio?

TIE = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expense}}

TIE = \frac{\text{Total Assets}}{\text{Total Liabilities}}

TIE = \frac{\text{Gross Profit}}{\text{Interest Expense}}

TIE = \frac{\text{Net Income}}{\text{Interest Expense}}

Previous problemNext problem

Verified step by step guidance

Step 1: Understand the concept of Times Interest Earned (TIE) ratio. It is a financial metric used to measure a company's ability to meet its interest obligations. The formula involves Earnings Before Interest and Taxes (EBIT) and Interest Expense.

Step 2: Identify the correct formula for TIE ratio. The formula is TIE = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expense}}.

Step 3: Analyze why other formulas provided in the problem are incorrect. For example, TIE = \frac{\text{Total Assets}}{\text{Total Liabilities}} is not related to interest coverage but rather to the financial structure of the company. Similarly, TIE = \frac{\text{Gross Profit}}{\text{Interest Expense}} and TIE = \frac{\text{Net Income}}{\text{Interest Expense}} do not accurately reflect the company's ability to cover interest expenses.

Step 4: Recognize that EBIT is used in the formula because it represents the earnings available to pay interest before considering interest and taxes, making it the most relevant metric for this calculation.

Step 5: To compute the TIE ratio, divide the company's EBIT by its Interest Expense using the formula TIE = \frac{\text{EBIT}}{\text{Interest Expense}}. This will provide the number of times the company can cover its interest obligations with its earnings.