Caterpillar Inc. consists of two business units: the manufacturing company (parent corporation) and a wholly-owned finance subsidiary. These two units are consolidated in Caterpillar's \(10-\mathrm{K}\) report. Following is a supplemental disclosure that Caterpillar includes in its \(10-\mathrm{K}\) report that shows the separate balance sheets of the parent and the subsidiary, as well as consolidating adjustments and the consolidated balance sheet presented to shareholders. This supplemental disclosure is not mandated under GAAP, but is voluntarily reported by Caterpillar as useful information for investors and creditors. Using this disclosure, answer the following requirements

\section*{Required}

a. Do the parent and subsidiary companies each maintain their own financial statements? Explain. Why does GAAP require consolidation instead of separate financial statements of individual companies?

b. What is the balance of Investments in Financial Products subsidiaries as of December 31, 2007, on the parent's balance sheet? What is the equity balance of the financial products subsidiaries to which this relates as of December 31, 2007? Do you see a relation? Will this relation always exist?

c. Refer to your answer for part \(a\). How does the equity method of accounting for the investment in the subsidiary companies obscure the actual financial condition of the parent company that is revealed in the consolidated financial statements?

d. Refer to the Consolidating Adjustments column reported-it is used to prepare the consolidated balance sheet. Generally, what do these adjustments accomplish?

e. Compare the consolidated balance of stockholders' equity with the stockholders' equity of the parent company (Machinery and Engines). Will the relation that is evident always hold? Explain.

f. Recall that the parent company uses the equity method of accounting for its investment in the subsidiaries, and that this account is eliminated in the consolidation process. What is the relation between consolidated net income and the net income of the parent company? Explain.
g. What is the implication for the consolidated balance sheet if the fair value of the Financial Products subsidiaries is greater than the book value of its stockholders' equity?

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December 31 (Millions of Dollars) Assets Cash and short-term investments Receivables-trade and other. Receivables-finance... Deferred and refundable income taxes. Prepaid expenses and other current assets. Inventories Total current assets Property, plant and equipment-net Long-term receivables-trade and other. Long-term receivables-finance Investments in unconsolidated affiliated companies Investments in Financial Products subsidiaries. Noncurrent deferred and refundable income taxes Supplemental Consolidating Data Machinery and Financial Consolidating Engines Products Adjustments 2007 2006 2007 2006 2007 2006 2007 Consolidated 2006 $ 862 $ 319 $ 260 $ 211 $ 1,122 $ 530 4,715 3,924 - 525 10,961 368 11,379 3,009 4.315 (3,458) (4,575) 8,249 8,607 7,503 6,804 746 656 70 77 - 816 733 565 616 39 41 (21) (19) 583 638 7,204 6,351 7,204 6,351 14,092 11.866 11,855 12,076 (470) (279) 25,477 23,663 6,782 90 6,046 155 3,215 2,805 30 30 565 675 9,997 685 8,851 - 3,948 - 610 559 3,513 14,057 12 12,236 (595) (705) 12 (24) (9) 13,462 598 860 11,531 562 - - (3,948) (3,513) - 1,803 2,218 68 39 (318) (308) 1,553 1,949 471 382 4 5 475 387 1,963 1,904 1,963 1,904 293 352 1,629 1,390 1,922 1,742 Intangible assets Goodwill.. Other assets. Total assets. Liabilities Short-term borrowings. $30,052 $26,995 $30,870 $28,593 $(4,790) $(4.139) $56,132 $51,449 187 $ 165 $ 5,556 $ 5,077 $ (275) $ (87) $ 5,468 $ 5,155 Accounts payable.. 4,518 3,907 373 Accrued expenses 1,932 1,848 1,273 344 1,101 (168) (166) 4,723 4,085 (27) (26) 3,178 2,923 Accrued wages, salaries and employee benefits. 1,108 922 18 16 1,126 938 Customer advances 1,442 921 - - 1,442 921 Dividends payable 225 194 - 225 194 Other current liabilities Long-term debt due within one year 867 1,026 Total current liabilities... Long-term debt due after one year 180 418 10,459 9,401 3,669 3,724 5,058 5,879 105 4,952 127 (21) (8) 951 1,145 4,043 5,132 4,461 Liability for postemployment benefits Other liabilities Total liabilities. Stockholders' equity Common stock. Treasury stock... Profit employed in the business. Accumulated other comprehensive income. Total stockholders' equity Total liabilities and stockholders' equity 21,169 20,136 26,922 25,080 $ (860) $ (862) $2,744 $ 2,465 2,744 $ 2,465 $ 860 $ 862 (9,451) (7,352) - (9,451) (7,352) 17,398 14,593 (1,808) (2,847) 2,566 522 2,325 326 (2,566) (2,325) 17,398 14,593 (522) (326) (1,808) (2.847) (3,948) (3,513) 8,883 6,859 8,883 6,859 3,948 3,513 $30,052 $26,995 $30,870 $28.593 $(4,790) $(4,139) $56,132 $51,449 1,983 1,132 12,277 10,708 14,190 13.986 1 454 (287) 386 (321) (842) (626) (491) (30) (30) 17,829 17,680 5,059 5,879 (309) 2,116 1,209 22,245 19,822 47,249 44,590