1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
On page 17, note 2 states that in 1984 Harnischfeger altered their depreciation from a direct method to the straight-line method for financial reporting purposes. They also included the products purchased from Kobe Steel, LTD and sold by them in their net sales instead of stating only the gross margin per unit. An adjustment of the residual values on certain machinery and equipment was made and they also included the financial statements of some foreign subsidiaries. 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?
By Harnischfeger adjusting its depreciation policy to the straight-line method; it allowed the company increase net income as the adjustments are being applied retroactively. This change increased the net income to 11 million for 1984. This will decrease profit in future years, and with the straight line they will continue to depreciate in the same amount for the life of the asset. This change will decrease profit going forward, because the straight line method they will continue to depreciate in the same amount for the remaining life of the asset. 3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
The change will increase profits by $3.2 million or $.27 per share, but reduces them in future profits to be reported. 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, it is justifiable since in the Consolidated Statement of Operations, revenues went down from $447,461 to $398,708 in two years. Meaning that if Harnischfeger was experiencing a diminishment in sales, this would give less use to their machinery, and that would cause less wear and tear to the machinery justifying and increase on the useful life of the asset. 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. LIFO liquidation would occur if current sales are higher than current purchases, as a result, any inventory not sold in previous periods must be liquidated. The effect of the LIFO liquidation on the Harnischfeger’s income statement is an increase in net income by $2.4 million or $.20 in the 1984 fiscal year. The balance sheet would have decrease of inventory, due to liquidation. 6. Note 8 states Harnischfeger’s allowance for doubtful accounts. Compute the ratio of the allowance to gross receivables (receivables before the allowance) in 1983 and 1984. What would the allowance have been if the company maintained the ratio at the 1983 level? How much did the pre-tax income increase as a result of the changed ratio in 1984? Gross records of sales ($428 + $6.4) = $434.4
Proportion of remittance to receivables = $6.4/$434.4 = 1.47% The measure of receivables in 1984 = $566 + $5.9 = $571.9 million obligations as per the degree = $571.19 x 1.47% =$8.43
Increase in pre-tax income = $8.43 - $5.9 = $2.52 million
7. Note 9, on page 216, states that Harnischfeger decreased R&D expense in 1984 relative to the previous two years. Do you think this change was motivated by business considerations or accounting considerations? How did this change affect the company’s reported profits in 1984?
Since the accounting practices were not the best, I believe that this action was motivated by business considerations. In 1984, Harnischfeger´s reported profits during each of the four quarters, ending the year with a pre-tax operating profit of...