Harnischfeger Case Study

The Harnischfeger Case Essay examples

900 WordsMay 18th, 20074 Pages

ACC 613
Chapter 3: Harnischfeger Case

1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these on the company's 1984 reported profits.

Harnischfeger made the following accounting policy changes and accounting estimates during the year 1984.

• There was a change in the recognition of some types of sales. This resulted in a change in sales calculation. Harnischfeger incorporated products purchased from Kobe Steel, which were re-sold by the company, into its net sales. This increased aggregate sales and cost of sales by $28 million.
• There was a change in the fiscal year for some foreign subsidiaries.
• There was a…show more content…

Overall, depreciation changes resulted in an increase of $3.2 million in net income in 1984.
• The effect of LIFO inventory liquidation was an increase in 1984 net income by $2.4 million, as gains. The balance sheet also reflected an improvement in liquidity.
• The effect of the change in the allowance for doubtful accounts was that it resulted in $2.9 million in operating income for 1984.
• The effect of the change in R&D expenses was an increase in operating profit by $9.1 million.
• The effect of the change in pension plans was a reduction in pension expenses by $14 million, increase in net income by $3.9 million, and a positive cash flow.

2. What do you think are the motives of Harnischfeger's management in making the changes in its financial reporting policies? Do you think investors will see through these changes?

• The principal motive for the Harnischfeger management was to show profit in 1984. This was necessary since the company was preparing to celebrate 100 years of doing business and management was eager to prove to investors that the company was doing well. Management was also motivated by incentive compensation; the board of directors established an Executive Incentive Plan which provided an incentive compensation opportunity of 40% of annual salary for 11 senior executive officers only if the Corporation reached a specific net after-tax profit objective

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Harnischfeger Corporation 1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. The company added products that they purchased from Kobe Steel, Ltd and sold by the corporation to reflect more effectively the nature of the corporation’s transaction with Kobe (Papelu, 1985). Harnischfeger included financial statements of certain foreign subsidiaries. For financial purposes, Harnischfeger Corporation changed the way they compute the depreciation method - going from accelerated method to straight line method. The company changed the depreciation life on plants, and the residual values on certain machinery. This resulted in increased net income for 1984 by $3.2 million or $2.7 per share (Papelu, 1985). 2. What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years? After the changed the depreciation accounting method, the company’s reported income increased by $11 million (Papelu, 1985). Also with the change in the depreciation accounting method, the company’s net income in 1984 was $15.2 million (Papelu, 1985). The change in the depreciation accounting method will have an effect on future earnings in the future years. The reason is because the depreciation expenses will spread out in the future years under the straight line method expenses will continue to depreciate in the same amount with their remaining assets. 3. What is the effect of the depreciation lives change? How will this change affect future reported profits? The financial numbers are likely to improve. With the effect of the depreciation lives change, the company increased its net income by $3.2 million (Papelu, 1985). The change will also cause the future reported profit to increase because the depreciation live (i.e. plants, equipments, machinery) will cause the company to spend less money annually on depreciation expenses. 4. The depreciation accounting changes assume that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly. Given the business conditions Harnischfeger was facing in its primary industries in 1984, are these economic assumptions justified? Yes, I believe that the economic assumptions were justified for the 1984 fiscal year because the

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