Harnischfeger Corporation Case Study

Harnischfer Case Study

Harnischfeger Case Study

Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.

The changes that the company made were to taking a significant amount of write offs and sales of different subsidiaries. ("Harnischfeger Corporation," 2012)

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?

Deprecation caused the losses for the firm to increase and the earnings to decline. In future, these shifts will improve the balance sheet and accelerate earnings. ("Harnischfeger Corporation," 2012)

What is the effect of the depreciation lives change? How will this change affect future reported profits?

Depreciation lives change, will make the financial picture in the current year look worse. This will have a positive impact on future profits by improving the balance sheet and earnings per share. ("Harnischfeger Corporation," 2012)

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. This is because the company is dealing with a slowdown it faced in manufacturing and over purchasing its equipment. ("Harnischfeger Corporation," 2012)

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 means the company is selling their latest equipment first. The affects this is having on the balance sheet is to improve the company's liquidity position. ("Harnischfeger Corporation," 2012)

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?

The ratio for doubtful accounts is higher in 1983 versus 1984. If this allowance would have been maintained at the 1983 ratio, it would have resulted in a decrease in pretax income by $3 million from making these changes. ("Harnischfeger Corporation," 2012)

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?

The changes in R&D expenses were related to business considerations. This caused the company's profit margins to decline in 1984. ("Harnischfeger Corporation," 2012)

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?