Question

Farrar Cakes disclosed total liabilities of $5,400,000, total assets of $8,000,000, interest expense of $400,000, income taxes of $600,000, and net income of $1,000,000 in their 2020 Annual Report. Based on this, Farrar Cakes’ times interest earned ratio is

Answer 1

5

Step-by-step explanation:

Interest earned ratio is a financial ratio used to measure a company's ability to meet its obligations to the providers of the long term debt based on earnings.

It is measured as the earnings before interest and taxes (EBIT) divided by the total interest payable on bonds and other debt.

Earnings before interest and taxes (EBIT) = $1,000,000 + $600,000 + $400,000 = $2,000,000

Farrar Cakes’ times interest earned ratio

= $2,000,000/$400,000

= 5