This problem demonstrates the dramatic effect that consolidation accounting can have on a company’s ratios. Ford Motor Company (Ford) owns 100% of Ford Motor Credit Corporation (FMCC), its financing subsidiary. Ford’s main operations consist of manufacturing automotive products. FMCC mainly helps people finance the purchase of automobiles from Ford and its dealers. The 2 companies’ individual balance sheets are adapted and summarized as follows (amounts in billions):
Assume that FMCC’s liabilities include $1.6 billion owed to Ford, the parent company.
1. Compute the debt ratio of Ford Motor Company considered alone. (p. 157)
2. Determine the consolidated total assets, total liabilities, and stockholders’ equity of Ford Motor Company after consolidating the financial statements of FMCC into the totals of Ford, the parent company. (pp. 548–549)
3. Recompute the debt ratio of the consolidated entity. Why do companies prefer not to consolidate their financing subsidiaries into their own financial statements? (p. 157)
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