ACCA Applied Skills · Financial Reporting · Calculation and interpretation of accounting ratios and trends to address users' and stakeholders' needs
Kora Co reported profit before interest and tax of $840,000. Finance costs were $120,000, which includes $20,000 of interest on a bank overdraft and $100,000 of interest on loan notes. What is interest cover, calculated as profit before interest and tax divided by total finance costs?
Interest cover is 7.0 times, found by dividing profit before interest and tax of $840,000 by total finance costs of $120,000. All interest, including overdraft interest, belongs in the denominator, so using only loan note interest would overstate the cover.
- A7.0 timesCorrect
- B8.4 times
- C42.0 times
- D6.0 times
Explanation
Interest cover = 840,000 / 120,000 = 7.0 times. Using only loan note interest gives 8.4 times, which wrongly omits overdraft interest. Using only overdraft interest gives 42 times.
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