63. Which formula yields a cash × interest earned ratio of 11?
Answer: C
Cash before interest and taxes of $11,000 / cash paid for interest of $1,000 yields a cash × interest earned ratio of 11.
The formula that produces a cash × interest earned ratio of 11 is the division of cash before interest and taxes, which is $11,000, by cash paid for interest, which is $1,000. This results in a ratio of 11:1.
A) Cash before interest and taxes of $11,000 / cash paid for income taxes of $1,000
This option calculates a cash × interest earned ratio of 11,000 / 1,000, which equals 11; however, it refers to cash paid for income taxes instead of interest. The ratio is not relevant to interest earned, making this option incorrect.
B) Cash before interest and taxes of $11,000 / cash paid for acquisitions of $1,000
This calculation also results in a ratio of 11,000 / 1,000, equating to 11. However, since it involves cash paid for acquisitions rather than interest, it does not accurately reflect the cash × interest earned ratio, rendering it incorrect.
C) Cash before interest and taxes of $11,000 / cash paid for interest of $1,000
This option correctly computes the cash × interest earned ratio as 11,000 divided by 1,000, yielding a ratio of 11. This directly addresses the question by focusing specifically on interest, confirming its accuracy.
D) Cash before interest and taxes of $11,000 / cash from operations of $1,000
This option gives a ratio of 11,000 / 1,000, which equals 11. Nonetheless, cash from operations does not pertain to interest expenses, making this option irrelevant for determining the cash × interest earned ratio.
Conclusion
The correct answer, option C, is definitive because it directly relates cash before interest and taxes to cash paid for interest, producing the required ratio of 11. Options A, B, and D, while mathematically yielding the same ratio, do not focus on interest, thus failing to meet the criteria established by the question.