Question: (Learning Objective 3: Analyzing consolidated fi nancial statements) This problem demonstrates the dramatic effect that consolidation accounting can have on a companys ratios. Fixed Motor

(Learning Objective 3: Analyzing consolidated fi nancial statements) This problem demonstrates the dramatic effect that consolidation accounting can have on a company’s ratios.

Fixed Motor Company (Fixed) owns 100% of Fixed Motor Credit Corporation (FMCC), its fi nancing subsidiary. Fixed’s main operations consist of manufacturing automotive products.

FMCC mainly helps people fi nance the purchase of automobiles from Fixed and its dealers. The two companies’ individual balance sheets are adapted and summarized as follows (amounts in billions):

❙ Requirements 1. Compute the debt ratio of Fixed Motor Company considered alone.
2. Determine the consolidated total assets, total liabilities, and shareholders’ equity of Fixed Motor Company after consolidating the fi nancial statements of FMCC into the totals of Fixed, the parent company.
3. Recompute the debt ratio of the consolidated entity. Why do companies prefer not to consolidate their fi nancing subsidiaries into their own fi nancial statements?

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