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

A problem with the Times Interest Earned (TIE) ratio is that it is based on:

Market value of equity, which fluctuates with stock prices

Earnings before interest and taxes (EBIT), which does not reflect actual cash flows available to pay interest

Total assets, which may not be related to interest payments

Net income, which includes non-operating items

Previous problemNext problem

Verified step by step guidance

Understand the Times Interest Earned (TIE) ratio: The TIE ratio measures a company's ability to meet its interest obligations. It is calculated as Earnings Before Interest and Taxes (EBIT) divided by interest expense.

Recognize the limitation of using EBIT: EBIT is an accounting measure that does not represent actual cash flows. It excludes non-cash items like depreciation and amortization, which can affect the company's ability to pay interest.

Identify the issue with net income: Net income includes non-operating items such as gains or losses from investments, which may not be related to the company's core operations or ability to pay interest.

Understand why market value of equity is irrelevant: The market value of equity fluctuates with stock prices and does not directly relate to the company's ability to meet interest payments.

Consider the irrelevance of total assets: Total assets represent the company's resources but do not directly indicate its ability to generate cash flows for interest payments.