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

The Times Interest Earned (TIE) ratio equals EBIT divided by which of the following?

Net income

Total liabilities

Interest expense

Total assets

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Verified step by step guidance

Understand the Times Interest Earned (TIE) ratio: It measures a company's ability to meet its interest obligations. The formula is TIE = EBIT / Interest Expense.

Identify the numerator in the formula: EBIT stands for Earnings Before Interest and Taxes. It represents the company's operating income before deducting interest and taxes.

Identify the denominator in the formula: The denominator is Interest Expense, which refers to the cost incurred by the company for borrowed funds.

Clarify why other options are incorrect: Net income includes deductions for interest and taxes, making it unsuitable for this ratio. Total liabilities and total assets are balance sheet items and do not directly relate to interest obligations.

Conclude the correct formula: The Times Interest Earned (TIE) ratio is calculated as EBIT divided by Interest Expense, which directly assesses the company's ability to cover its interest payments.