HERNISCHFEGER CORPORATION CASE ANALYSIS
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements
In 1984 they changed the depreciation method from accelerated methods to the straight-line for financial reporting purposes. This change included a adjustment of the residual values on certain machinery and equipment. They also included the products purchased from Kobe Steel, LTD and sold by them in their net sales. Moreover, 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?
It increased the net income to 11 million for 1984. The straight-line method will allow the assets to continue to depreciate in the same amount for the life of the asset. This change will decrease profit in future years, because with the accelerated method, in the future years the depreciation expense would have been lower
3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
The depreciation live increase decreases the annual depreciation expense, which increase in future profits 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?
I think they were, because if they were experiencing a diminishment in sales this would also mean that they were giving 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.
The LIFO inventory’s method allowed the company’s inventory cost to liquidate their older LIFO inventory. A 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. In the case of Harnischfeger, it benefited the income statement by 2.4 million in 1984. Meaning that the net loss of previous year 1983 was reduced by approximately 15.6 million. 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?
1983: 6.4/63.740 = 10.04%
1984: 5.9/87.647 = 0.0067%
7. Note 9, 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?
I believe this change is part of the accounting policies of the company. If reporting more expenses (R&D), the company would have to justify it with profits, which in the case of Harnischfeger would be hard to accomplish due to the debt to pay and net loss reported in 1983 and 1982.
This change affected the company’s report profits by 7 million from 1984 to 1983 and by 9 million from 1984 to 1982.
8. Note 11, describes a number of changes in Harnischfeger’s pension plans in 1984. Describe these changes as clearly as you can. What are the economic consequences of these changes to Harnischfeger and its workers?
Benefits and wedges were reduced significantly from 1982 to 1984....
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