Question

POP Financing activities section of the cash flow statement. Operating activities section of the cash flow statement. Investing activities section of the cash flow statement both a and b. POP The times interest earned ratio uses income before interest expense and taxes because interest and taxes are important components in all ratio analysis. paying interest and taxes does not affect a company's solvency. the ratio is easier to compute without these items. this number best represents the amount available to pay interest. A bond issued at a premium is issued by a corporation with an excellent credit rating. has a stated rate of interest that exceeds the market rate. sell at a price in excess of the face amount of the bond. both b and c above. OP Discount on Bonds Payable is a contra liability. is an expense. is deducted from bonds payable on the balance sheet. both a and c above. 10. Contingencies must be accrued as liabilities if the company can determine a reasonable estimate of the debt. the amount is over $10,000 it is probable the company will suffer a loss. both a and c above. Chapter 11 Vocabulary Quiz Net income that is retained in the business. The amount per share of stock that must be retained in the business for the protection of corporate creditors. Capital stock that has contractual preferences over common stock in certain areas. A corporation that may have thousands of stockholders and whose stock is regularly traded on a national securities market. Capital stock that has been issued and is being held by stockholders. Capital stock that has been assigned a value per share in the corporate charter. A corporation's own stock that has been issued, fully paid for, and reacquired by the corporation but not retired. The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share. The date when ownership of outstanding shares is determined for dividend purposes. A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends.

Answer 1

7]

Times interest earned ratio is also called the interest coverage ratio. It measures the funds available to pay interest as a multiple of the interest expense.

The answer is (d) - Measuring the funds available to pay interest is best measured by computing the income before paying interest expense and taxes. We use income before taxes because interest is a tax-deductible expense.

(a) is incorrect - Interest and taxes are important in some ratios where they are relevant, not in all ratio analysis.

(b) is incorrect - Paying interest and taxes affects the solvency because they are cash expenses.

(c) is incorrect - A ratio is computed with an objective in mind, and not just because it is easier.