ExpertEasy2 marksMultiple Choice
ACCA · Question 34 · Interpretation of financial statements
Section A
A company has an operating profit (Profit Before Interest and Tax) of $120,000. Its finance costs for the year are $30,000, and its tax expense is $20,000.
What is the company's interest cover ratio?
Section A
A company has an operating profit (Profit Before Interest and Tax) of $120,000. Its finance costs for the year are $30,000, and its tax expense is $20,000.
What is the company's interest cover ratio?
Answer options:
A.
3 times
B.
4 times
C.
2.3 times
D.
6 times
How to approach this question
Use the formula: Interest Cover = Profit Before Interest and Tax (PBIT) / Finance Costs.
Full Answer
B.4 times✓ Correct
Interest cover ratio = Profit Before Interest and Tax (PBIT) / Finance costs.
Ratio = $120,000 / $30,000 = 4 times. This means the company generates enough operating profit to pay its interest bill 4 times over.
Common mistakes
Using Profit After Tax or Profit Before Tax instead of PBIT.
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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