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 a measure of long-term:

profitability from sales revenue

ability to meet interest obligations from operating income

liquidity to pay current 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 is a financial metric used to evaluate a company's ability to meet its interest obligations using its operating income. This ratio is crucial for assessing financial stability and long-term solvency.

Identify the formula for the TIE ratio: The formula is \( \text{TIE Ratio} = \frac{\text{Operating Income}}{\text{Interest Expense}} \). Operating income is also referred to as EBIT (Earnings Before Interest and Taxes).

Analyze the purpose of the TIE ratio: It measures how many times a company can cover its interest expense with its operating income. A higher ratio indicates a stronger ability to meet interest obligations, while a lower ratio suggests potential financial risk.

Compare the given options: The correct interpretation of the TIE ratio is 'ability to meet interest obligations from operating income,' as it directly relates to the formula and purpose of the ratio.

Conclude the reasoning: The TIE ratio does not measure profitability from sales revenue, liquidity to pay current liabilities, or efficiency in managing inventory. Its sole focus is on the company's capacity to cover interest expenses using operating income.