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Times Interest Earned Ratio A1 Compute the times interest earned ratio and use it to analyze liabilities. Interest expense is often called a fixed expense because it usually does not vary due to short-term changes in sales or other operating activities. While fixed expenses can be good when a company is growing, they create risk. The risk is that a company might be unable to pay fixed expenses if sales decline. Consider Diego Co.'s results for 2019 and two possible outcomes for year 2020 in O Exhibit 11.6. Expenses excluding interest are expected to remain at 75% of sales. Expenses that change with sales volume are variable expenses. Interest expense is fixed at $60 per year. Page 410 EXHIBIT 11.6 Actual and Projected Results 2020 Projections $ millions 2019 Sales Increase Sales Decrease Sales $600 $900 $300 Expenses (75% of sales) 450 675 225 Income before interest 150 225 75 Interest expense (fixed) бо 60 60 Net income $ 90 $165 $ 15

Times Interest Earned Ratio A1 Compute the times interest earned ratio and use it to analyze liabilities. Interest expense is often called a fixed expense because it usually does not vary due to short-term changes in sales or other operating activities. While fixed expenses can be good when a company is growing, they create risk. The risk is that a company might be unable to pay fixed expenses if sales decline. Consider Diego Co.'s results for 2019 and two possible outcomes for year 2020 in O Exhibit 11.6. Expenses excluding interest are expected to remain at 75% of sales. Expenses that change with sales volume are variable expenses. Interest expense is fixed at $60 per year. Page 410 EXHIBIT 11.6 Actual and Projected Results 2020 Projections $ millions 2019 Sales Increase Sales Decrease Sales $600 $900 $300 Expenses (75% of sales) 450 675 225 Income before interest 150 225 75 Interest expense (fixed) бо 60 60 Net income $ 90 $165 $ 15

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Compute the times interest ratio and use it to analyze liabilities.

 

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Times Interest Earned Ratio A1 Compute the times interest earned ratio and use it to analyze liabilities. Interest expense is often called a fixed expense because it usually does not vary due to short-term changes in sales or other operating activities. While fixed expenses can be good when a company is growing, they create risk. The risk is that a company might be unable to pay fixed expenses if sales decline. Consider Diego Co.'s results for 2019 and two possible outcomes for year 2020 in O Exhibit 11.6. Expenses excluding interest are expected to remain at 75% of sales. Expenses that change with sales volume are variable expenses. Interest expense is fixed at $6o per year. Page 410 EXHIBIT 11.6 Actual and Projected Results 2020 Projections $ illions 2019 Sales Increase Sales Decrease Sales $600 $900 $300 Expenses (75% of sales) 450 675 225 Income before interest 150 225 75 Interest expense (fixed) 60 бо бо Net income $ 90 $165 $ 15
Transcribed Image Text:Times Interest Earned Ratio A1 Compute the times interest earned ratio and use it to analyze liabilities. Interest expense is often called a fixed expense because it usually does not vary due to short-term changes in sales or other operating activities. While fixed expenses can be good when a company is growing, they create risk. The risk is that a company might be unable to pay fixed expenses if sales decline. Consider Diego Co.'s results for 2019 and two possible outcomes for year 2020 in O Exhibit 11.6. Expenses excluding interest are expected to remain at 75% of sales. Expenses that change with sales volume are variable expenses. Interest expense is fixed at $6o per year. Page 410 EXHIBIT 11.6 Actual and Projected Results 2020 Projections $ illions 2019 Sales Increase Sales Decrease Sales $600 $900 $300 Expenses (75% of sales) 450 675 225 Income before interest 150 225 75 Interest expense (fixed) 60 бо бо Net income $ 90 $165 $ 15
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