Question

in the current year, a corporation had net income of $100,000, interest expense of $20,000, and tax expense of $30,000. its net sales were $1,000,000 and its cost of goods sold was $400,000. what was its times interest earned for the year?

Answer 1

To calculate the times interest earned ratio, subtract the cost of goods sold from the net sales to find the operating income. Then divide the operating income by the interest expense to get the times interest earned ratio. In this case, the ratio is 7.5.

Step-by-step explanation:

To calculate the times interest earned ratio, we need to find the operating income and divide it by the interest expense. The operating income can be calculated by subtracting the cost of goods sold from the net sales.

Net Sales - Cost of Goods Sold = $1,000,000 - $400,000

= $600,000

Operating Income = Net Income + Interest Expense + Tax Expense

= $100,000 + $20,000 + $30,000

= $150,000

Times Interest Earned = Operating Income / Interest Expense

= $150,000 / $20,000

= 7.5

The times interest earned ratio for the year is 7.5.