Which of the following is NOT added back to Net Profits After Taxes to produce the numerator in Coverage Ratio?


A. profits taxes

B. interest on debt

C. cost of materials

D. depreciation

To determine the numerator in the Coverage Ratio, we need to add specific items back to the Net Profits After Taxes.

The Coverage Ratio measures a company's ability to cover its fixed charges or obligations. In this case, we're looking for the item that is NOT added back.

A. Profits taxes: This item is typically added back to Net Profits After Taxes because it represents an expense that is deducted from the profits. Adding it back allows us to calculate the earnings before taxes.

B. Interest on debt: This item is added back because it represents the interest expense on the company's debt. By adding it back, we get a clearer picture of the company's profitability without the impact of financing costs.

C. Cost of materials: This item is NOT typically added back to Net Profits After Taxes. The cost of materials is an expense that is directly related to the company's operations and is necessary for producing its goods or services. It is already accounted for in the calculation of Net Profits After Taxes.

D. Depreciation: This item is often added back because depreciation is a non-cash expense. It represents the decrease in value of assets over time, but it doesn't directly affect the company's ability to cover its fixed charges. By adding it back, we adjust for the non-cash nature of this expense.

Based on the above explanation, the answer is C. The cost of materials is NOT added back to Net Profits After Taxes to produce the numerator in Coverage Ratio.