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

When the times interest earned (TIE) ratio is less than 1.0, a company is ______.

experiencing strong profitability

unable to cover its interest expense from its operating income

increasing its retained earnings

generating enough income to pay dividends

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Verified step by step guidance

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

\frac{Operating Income}{Interest Expense}

Interpret the TIE ratio: A TIE ratio greater than 1.0 indicates that the company generates sufficient operating income to cover its interest expenses. Conversely, a TIE ratio less than 1.0 means the company cannot fully cover its interest expenses from its operating income.

Analyze the implications of a TIE ratio less than 1.0: When the ratio is below 1.0, the company is unable to meet its interest obligations solely from its operating income, which may indicate financial distress or insufficient profitability.

Evaluate the provided options: Based on the definition and implications of the TIE ratio, determine which option aligns with the scenario where the TIE ratio is less than 1.0. The correct answer is 'unable to cover its interest expense from its operating income.'

Conclude the reasoning: The TIE ratio is a critical indicator of financial health, and a value below 1.0 signals that the company may need to rely on other sources of funds (e.g., retained earnings or external financing) to meet its interest obligations.