Last year, Nemo's Fish 'n Chips recorded the following financial data: sales = $85,000; cost of goods sold = $45,000; selling and administrative expenses = $25,000; depreciation and amortization = $7,000; and interest expense = $12,000. The tax rate was 30%. Find Nemo's interest coverage for last year.
A)-0.29 times
B)0.66 times
C)0.86 times
D)1.25 times

Question

Quizplus · Accepted Answer

Interest coverage ratio is calculated as EBIT (Earnings Before Interest and Taxes) divided by interest expense. EBIT is sales minus cost of goods sold and selling and administrative expenses, but before subtracting interest and taxes. So, EBIT = $85,000 - $45,000 - $25,000 = $15,000. Depreciation and amortization are non-cash expenses and do not affect the calculation. Therefore, interest coverage = $15,000 / $12,000 = 1.25 times.

Last Year, Nemo's Fish 'N Chips Recorded the Following Financial