Here is some financial statement information for a business. Calculate the times interest earned for the current year.

Prior year Current year
Cash 10,070 11,416
Accounts receivable 5,244 6,464
Accounts payable 9,505 13,479
Sales revenue 202,729 244,199
Gross profit 103,420 114,713
Interest expense 1,592 2,071
Profit before tax 63,698 68,747
Net profit 46,694 41,525

Round the answer to one decimal place.

Question

Here is some financial statement information for a business. Calculate the times interest earned for the current year.

Prior year	Current year
Cash	 10,070	11,416
Accounts receivable	5,244 	6,464 
Accounts payable	9,505 	13,479 
Sales revenue	202,729 	244,199 
Gross profit	103,420 	114,713 
Interest expense	1,592 	2,071 
Profit before tax	63,698 	68,747 
Net profit 	46,694 	41,525

Round the answer to one decimal place.

BlackTom AI · Accepted Answer

First, identify what is asked: the times interest earned (TIE) for the current year, which measures how many times a company can cover its interest charges with its operating earnings.
Next, determine the components needed for TIE. The formula is TIE = EBIT / Interest expense. EBIT stands for earnings before interest and taxes, which can be derived from Profit before tax by adding back the interest expense.
From the current year data:
- Profit before tax = 68,747
- Interest expense = 2,071
Add back the interest to obtain EBIT: 68,747 + 2,071 = 70,818.
Now compute TIE: 70,818 ÷ 2,071.
Perform the division: 2,071 × 34 = 70,414, which is slightly low, leaving a remainder of 404. To refine, 404 ÷ 2,071 ≈ 0.195. So the quotient is approximately 34.195.
Round the result to one decimal place as required: 34.2.
Therefore, the times interest earned for the current year is about 34.2 times.
For context, this means the company earned enough operating income to cover its interest expense about 34.2 times over, indicating strong coverage of interest obligations.
Note on alternative interpretations: if someone mistakenly used Net income or only Profit before tax without adding back interest, they would obtain a much lower and incorrect TIE, since EBIT requires excluding interest but including taxes; using Profit before tax alone would neglect the interest expense entirely, misrepresenting the true debt service ability.

BACC011 Week 6: Practice Quiz

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