Multiple-choice questions:

a. Which of the following ratios can be used as a guide to a firm’s ability to carry debt from an income perspective?

1. Debt ratio

2. Debt to tangible net worth

3. Debt/equity

4. Times interest earned

5. Current ratio

b. There is disagreement on all but which of the following items as to whether it should be considered a liability in the debt ratio?

1. Short-term liabilities

2. Reserve accounts

3. Deferred taxes

4. Noncontrolling income (loss)

5. Preferred stock

c. A firm may have substantial liabilities that are not disclosed on the face of the balance sheet from all but which of the following?

1. Leases

2. Pension plans

3. Joint ventures

4. Contingencies

5. Bonds payable

d. In computing the debt ratio, which of the following is subtracted in the denominator?

1. Copyrights

2. Trademarks

3. Patents

4. Marketable securities

5. None of the above

e. All but which of these ratios are considered to be debt ratios?

1. Times interest earned

2. Debt ratio

3. Debt/equity

4. Fixed charge ratio

5. Current ratio

f. Which of the following statements is false?

1. The debt to tangible net worth ratio is more conservative than the debt ratio.

2. The debt to tangible net worth ratio is more conservative than the debt/equity ratio.

3. Times interest earned indicates an income statement view of debt.

4. The debt/equity ratio indicates an income statement view of debt.

5. The debt ratio indicates a balance sheet view of debt.

g. Sneider Company has long-term debt of $500,000, while Abbott Company has long-term debt of $50,000. Which of the following statements best represents an analysis of the long-term debt position of these two firms?

1. Sneider Company’s times interest earned should be lower than Abbott Company’s.

2. Abbott Company’s times interest earned should be lower than Sneider Company’s.

3. Abbott Company has a better long-term borrowing ability than does Sneider Company.

4. Sneider Company has a better long-term borrowing ability than does Abbott Company.

5. None of the above

h. A times interest earned ratio of 0.20 to 1 means

1. That the firm will default on its interest payment.

2. That net income is less than the interest expense (including capitalized interest).

3. That cash flow exceeds the net income.

4. That the firm should reduce its debt.

5. None of the above

i. In computing debt to tangible net worth, which of the following is not subtracted in the denominator?

1. Patents

2. Goodwill

3. Land

4. Bonds payable

5. Both 3 and 4

j. The ratio fixed charge coverage

1. Is a cash flow indication of debt-paying ability.

2. Is an income statement indication of debt-paying ability.

3. Is a balance sheet indication of debt-paying ability.

4. Will usually be higher than the times interest earned ratio.

5. None of the above

k. Under the Employee Retirement Income Security Act, a company can be liable for its pension plan up to

1. 30% of its net worth.

2. 30% of pension liabilities.

3. 30% of liabilities.

4. 40% of its net worth.

5. None of the above

l. Which of the following statements is correct?

1. Capitalized interest should be included with interest expense when computing times interest earned.

2. A ratio that indicates a firm’s long-term debt-paying ability from the balance sheet view is the times interest earned.

3. Some of the items on the income statement that are excluded in order to compute times interest earned are interest expense, income taxes, and interest income.

4. Usually, the highest times interest coverage in the most recent five-year period is used as the primary indication of the interest coverage.

5. None of the above

m. Which of these items does not represent a definite commitment to pay out funds in the future?

1. Notes payable

2. Bonds payable

3. Noncontrolling interests

4. Wages payable

5. None of the above