In 2014, 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) C Co. is more liquid than P. Co.
B) Lenders would be pleased with the ratios of both companies and be willing to lend them money for future expansion.
C) P Co. and C Co. have more than adequate ratios demonstrating their ability to cover interest charges with their earnings levels.
D) C Co's ratio is about 11.3% higher than P Co's ratio.

Question

Quizplus · Accepted Answer

The times interest earned ratio measures a company's ability to cover its interest charges with its earnings. A higher ratio indicates that the company is more capable of meeting its interest expense obligations. Thus, Statement A is false as C Co. having a higher ratio than P Co. indicates that it is more capable of meeting its interest expenses and is, therefore, more likely to be able to pay off its debt. Statements B, C, and D are true based on the ratios reported by the two companies.