Harnischfeger Corp

Read the “Harnischfeger Corp” case study and answer the following questions. Submit your completed assignment no later than the last day of Week 2. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. They included products purchased from Kobe Steel in their net sales causing them to increase by $5.4 million. They changed the way they compute depreciation expense by using the straight-line method, resulting in an increase in net income by $11 million or $.93 per common share. The depreciation policy and residual values were changed as well of machinery, plants, and equipment, which caused and increase in net income by $3.2 million or $.27 per share. 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? The net income increased by $11 million from changing the depreciation accounting method to the straight-line method. This will cause profit to increase in future years. What is the effect of the depreciation lives change? How will this change affect future reported profits? The effect from the change in the depreciation lives caused an increase of $3.2 million. The future reported profits would increase as well.

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, these economic assumptions are justified due to the fact that the company was having a loss in sales that causes them to use the machinery less often. With that being said, the machinery would last longer and will lose their value more slowly. 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 method of inventory that was used increased net income by $2.4 million.

LIFO(Last In, First Out) affects a company’s income statement and balance sheet when current sales are higher than current inventory, this would help increase net income. 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? Since accounts receivables were $428 million and net allowances for doubtful accounts were $6.4 million in 1983, the gross would be ($428 + $6.4 = $434.4) and the ratio would be ($6.4 / $434.4=1.47%). 1984 pre-tax income –

Gross -($566 + $5.9 = $571.9)
Allowance – ($571.9 * 1.47% = $8.40)
Pre – Tax – ($8.40 – $5.9 = $2.5 million)

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? I think this change was motivated by business considerations, due to their sales trend. This change helped increase the company’s profits due to the fact that R&D expenses were cut by $7million from the year before. 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? The changes that took place with the new plan are, first of all the expenses are more than $10 million cheaper than 2 years before. There is now a charge for assumption of investment return. This is saving the company a lot of money. Harnischfeger will have increased net income due to this adjustment of the pension plan while its workers will get decreased benefits due to the changes on the plan. How did the pension plan changes affect Harnischfeger’s financial statements in 1984? Are these changes likely to affect future profits?

The 1984 pension plan decreased expenses by over $4 million dollars than the previous year. The change in the plan will likely affect future profits by increasing net income. Summarize all the accounting changes Harnischfeger made in 1984 and their effects on pre-tax profits and cash flows in 1984. The change in sales due to the included Kobe Steel products of $5.4 million would not effect pre-tax profits and cash flows as they were recognized as gross margin. The change in the depreciation expense method increased net income by $11 million, but the cash flows are unaffected since depreciation is not cash. The change in the inventory method increased the pre-tax profits and cash flows by $2.4 million. The change in useful life of assets increase the pre-tax profits and cash flows by $3.2 million. The change in the pension plan increase the pre-tax profits and cash flows by over $4 million. Accounting statements are used by investors, lenders, customers, employees, and governments in dealing with Harnischfeger.

Among these groups, who is most likely to “see through” the above accounting changes, and who is least likely to do so? Investors are the ones that are the most likely to see accounting statements and the customers are the least likely. Are the accounting changes likely to help or to hinder Harnischfeger’s ability to implement its business plan? Be as specific as possible. The accounting changes are likely to help Harnischfeger’s ability to implement its business plan. With all the changes that have been done in the accounting expenses and changes mentioned in question 10, it gives them some freedom and the financial backup to help implement the plan. Overall, what is your assessment of Harnischfeger’s future as of 1984? Overall, I see Harnischfeger having a very profitable future, they have done a lot to help cut costs and be efficient. With the implementation of its business plan, it will thrive.