Question

The times interest earned ratio is computed as

a. Income before Income Tax ÷ Interest Expense.
b. (Net Income + Interest Expense) ÷ Interest Expense.
c. Net Income ÷ Interest Expense.
d. (Income before Income Tax + Interest Expense) ÷ Interest Expense.

Answer 1

The times interest earned ratio is computed as (Income before Income Tax + Interest Expense) ÷ Interest Expense. This ratio measures a company's ability to meet its interest payments.

Step-by-step explanation:

The times interest earned ratio is computed as: d. (Income before Income Tax + Interest Expense) ÷ Interest Expense.

This ratio is used to measure a company's ability to meet its interest payments. It indicates how many times a company's operating income can cover its interest expenses. A higher ratio is generally seen as favorable, as it suggests the company has sufficient earnings to easily meet its interest payments.

For example, if a company has an income before income tax of $100,000 and an interest expense of $10,000, the times interest earned ratio would be 110,000 ÷ 10,000 = 11.