Discuss WGU Accounting For Decision Makers (C213) Exam Topic 2 Question 7

Which formula yields a cash times interest earned ratio of 11?

ACash before interest and taxes of $11,000 / cash paid for acquisitions of $1,000

BCash before interest and taxes of $11,000 / cash paid for interest of $1,000

CCash before interest and taxes of $11,000 / cash from operations of $1,000

DCash before interest and taxes of $11,000 / cash paid for income taxes of $1,000

Suggested Answer: B

The correct answer is B. The cash times interest earned ratio measures a company's ability to cover its cash interest payments from cash generated before interest and taxes. The formula is:

Cash times interest earned = Cash from operations before interest and taxes / Cash paid for interest

If the ratio is 11, then the numerator must be 11 times the denominator. Using the amounts in the answer choices, $11,000 divided by $1,000 = 11, which matches the required result exactly. The Journal of Accountancy describes cash interest coverage using cash flow from operations adjusted for interest and taxes in the numerator and interest paid in the denominator.

Option A is incorrect because acquisitions relate to investing activities, not interest coverage. Option C is incorrect because dividing by cash from operations does not produce the interest coverage ratio. Option D is incorrect because income taxes are not the denominator in this ratio. This ratio is useful in solvency analysis because it shows how many times a firm can pay its interest obligations using cash-based operating performance. Therefore, Option B is the correct formula.

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12 comments · newest first

Chuck 2 months ago

But what about C? Cash from operations could work too.

Cassandra 2 months ago

I agree, B seems right. It directly relates to interest.

Ricki 2 months ago

I think it's B. Cash paid for interest makes sense here.

Carla 2 months ago

Are we sure about that? Seems off to me.

Eliseo 2 months ago

I thought it was A at first, but B makes sense.

My 2 months ago

Wait, how does that even work?

Gregoria 3 months ago

Totally agree, B is the right choice!

Arminda 3 months ago

Option B gives a ratio of 11!

Mammie 3 months ago

I'm a bit confused; I thought the ratio was more about cash flows related to financing rather than taxes or acquisitions.

Dulce 3 months ago

Could it be option C? I seem to recall something about cash from operations being relevant in these calculations.

Chu 3 months ago

I remember practicing similar questions, and I feel like the ratio should involve cash paid for interest, but I'm not entirely sure.

Gerald 4 months ago

I think the cash times interest earned ratio focuses on cash flows related to interest, so maybe option B?

WGU Accounting for Decision Makers (C213) Exam - Topic 2 Question 7 Discussion