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 is classified as an indicator of a company's:

ability to meet its interest obligations from operating income

profitability in relation to total assets

liquidity in covering short-term liabilities

efficiency in managing inventory

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Verified step by step guidance

Understand the concept of the Times Interest Earned (TIE) ratio: It measures a company's ability to meet its interest obligations using its operating income. The formula for TIE is:

\frac{Operating Income}{Interest Expense}

Analyze the options provided in the problem. The TIE ratio specifically focuses on the company's ability to cover interest expenses, which is directly related to its operating income rather than profitability, liquidity, or efficiency.

Eliminate incorrect options: Profitability in relation to total assets, liquidity in covering short-term liabilities, and efficiency in managing inventory are unrelated to the TIE ratio. These metrics are measured by other financial ratios such as Return on Assets (ROA), Current Ratio, and Inventory Turnover Ratio, respectively.

Focus on the correct interpretation: The TIE ratio is an indicator of the company's ability to meet its interest obligations from operating income. This is because operating income represents the earnings before interest and taxes (EBIT), which is the source of funds for paying interest expenses.

Conclude that the correct answer is: 'ability to meet its interest obligations from operating income,' as this directly aligns with the purpose and calculation of the TIE ratio.