This problem demonstrates the dramatic effect that consolidation accounting can have on a company's ratios. Snider Motor Company (Snider) owns 100% of Snider Motor Credit Corporation (SMCC), its financing subsidiary. Snider's main operations consist of manufacturing automotive products. SMCC mainly helps people finance the purchase of automobiles from Snider and its dealers. The two companies' individual balance sheets are adapted and summarized as follows (amounts in billions):
____________________________________ Snider (Parent) ____ SMCC (Subsidiary)
Total assets............................................................ $78.8 .......................... $163.1
Total liabilities........................................................ $63.8 ......................... $155.2
Total shareholders' equity........................................ 15.0 ...............................7.9
Total liabilities and equity....................................... $78.8 ........................ $163.1
Assume that SMCC's liabilities include $1.6 billion owed to Snider, the parent company.
Requirements
1. Compute the debt ratio of Snider Motor Company considered alone.
2. Determine the consolidated total assets, total liabilities, and shareholders' equity of Snider Motor Company after consolidating the financial statements of SMCC into the totals of Snider, the parent company.
3. Re-compute the debt ratio of the consolidated entity. Why do companies prefer not to consolidate their financing subsidiaries into their own financial statements?