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 computed as:

Total Assets divided by Interest Expense

Earnings Before Interest and Taxes (EBIT) divided by Interest Expense

Earnings Before Taxes (EBT) divided by Interest Expense

Net Income divided by Interest Expense

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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. The formula involves Earnings Before Interest and Taxes (EBIT) and Interest Expense.

Clarify the components of the formula: EBIT represents the company's operating income before deducting interest and taxes, while Interest Expense is the cost incurred for borrowed funds.

Identify the correct formula for TIE ratio: The formula is \( \text{TIE Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}} \). This formula ensures that the ratio reflects the company's ability to cover interest payments using its operating income.

Compare the incorrect options provided: Total Assets divided by Interest Expense, Earnings Before Taxes (EBT) divided by Interest Expense, and Net Income divided by Interest Expense are not appropriate because they do not accurately represent the company's operating ability to cover interest obligations.

Conclude that the correct formula is \( \text{TIE Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}} \), as it directly relates operating income to interest obligations, providing a clear measure of financial health.