Practicing Success

Target Exam

CUET

Subject

Accountancy

Chapter

Accounting Ratios

Question:

Which profit is used for calculating the interest coverage ratio?

Options:

Net profit before interest only

Net profit before interest and tax

Net profit after interest and tax

Net profit after interest only

Correct Answer:

Net profit before interest and tax

Explanation:

Interest Coverage Ratio : It is a ratio which deals with the servicing of interest on loan. It is a measure of security of interest payable on long-term debts. It expresses the relationship between profits available for payment of interest and the amount of interest payable. It is calculated as follows:
Interest Coverage Ratio = Net Profit before Interest and Tax/ Interest on long-term debts