CONSOLIDATING DIFFERENT KINDS OF BUSINESSES. Pinafore Manufac- turing Company has decided that competitive conditions require that it offer financing to its customers. Since Pinafore’s management has no experience in operating a finan- cial institution, it is considering acquiring in a business combination transaction all the stock of Staley Credit Corporation, a company that has specialized in providing credit to customers of manufacturers like Pinafore. If Staley is acquired, Pinafore will operate Staley as a subsidiary and consolidated financial statements will have to be prepared.

Edgar Hemmer, the president of Pinafore, observes (correctly) that the kinds and quantities of assets, liabilities, revenues, and expenses are quite different for Pinafore and Staley Credit Company. Edgar wonders whether it is wise to prepare consolidated financial statements when the two businesses are so different.

REQUIRED:

Explain why it is so appropriate for consolidated financial statements to include the balance sheets and income statements of all majority-owned businesses, regardless of the differences in their assets and liabilities and in the nature of their operating activities. (Hint: Read FASB Statement No. 94, paragraphs 28-33.)