In 20X4, C Co. reported a times interest earned ratio of 12.33 times while P Co. reported a ratio of 11.07 times. Which of the following statements is false?
A) P Co. and C Co. have more than adequate ratios demonstrating their ability to cover interest charges with their earnings levels.
B) C Co's ratio is about 11.3% higher than P Co's ratio.
C) C Co. is more liquid than P. Co.
D) Lenders would be pleased with the ratios of both companies and be willing to lend them money for future expansion.

Question

Quizplus · Accepted Answer

The times interest earned ratio measures a company's ability to cover its interest charges with its earnings, not its liquidity. Liquidity refers to a company's ability to meet its short-term obligations, which is not directly indicated by the times interest earned ratio.