1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. In the 1984 the corporation computed depreciation expense on plants, machinery and equipment by using the straight-line method for financial reporting purposes. These changes were made to provide a more equitable allocation of the cost of the plants.
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? Harnischfeger new method was insignificant; the changes were noted as an increase in net income by $11 million or $.93 per common and common equivalent share.
3. What is the effect of the depreciation lives change? How will this change affect future reported profits? The corporation has changed its estimated depreciation lives on certain U.S. plants, machinery, and equipment, which increased net income for 1984 $3.2 million or $.27 per share.
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? The consolidation of the statements of the operations indicates that the revenue in 1983 was declining as well as the uses of assets.
5. In Note 7, Harnischfeger describes the effect of LIFO inventory liquidation on its reported profits in 1984. Describe what is meant by LIFO liquidation and how liquidation affects a company’s income statement and balance sheet. If a company decides to perform a LIFO liquidation, the old costs will be matched with the current higher sales prices. Thus, a cost to using the LIFO liquidation method is higher tax liability if prices have risen since LIFO was adopted. The expected tax advantage of LIFO turns into a disadvantage because older, lower costs (of older inventory)...
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