The Audit Significance of the Financial Ratio, times Interest Earned

question 71

Multiple Choice

The audit significance of the financial ratio, times interest earned, is:

• A) this financial ratio provides a reasonableness test of the entity's proportion of equity that may be compared with prior years' experience or industry data.
• B) an unexpected increase or decrease in the depreciation expense as a percent of depreciable assets may indicate an error in calculating depreciation.
• C) an unexpected increase in this financial ratio may indicate the failure to record or capitalize depreciable assets.
• D) this financial ratio provides a test of the entity's ability to generate earnings to cover the cost of service debt.
• E) this financial ratio provides a reasonableness test of shareholders' equity given the company's earnings and financing structure.

---

Definitions:

End-of-period Spreadsheet

A financial document used to summarize account balances and adjustments at the end of an accounting period, facilitating the preparation of financial statements.

Accounting Records

Documents and books that capture all the financial transactions of a business or individual.

Closing Process

The procedure in accounting that involves the transfer of all income and expense account balances to the retained earnings to prepare the ledger for the next accounting period.

Real Accounts

Accounts that relate to assets, liabilities, and equity, which are not closed at the end of the accounting period and carry their balances into future periods.