Case Harnischfeger
John Knotwell
Fa14 ACCT6350NT1
9/13/2014
Harnischfeger Case Analysis 1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these changes on the company’s 1984 reported profits.
Harnischfeger began to account Kobe Steel sales in US, previously it only added the gross margin on Kobe–originated equipment in the financial statement. As a result, both aggregated sales and cost of sales increased by $28 million. Harnischfeger Foreign consolidated subsidiaries are effectively included in the financial statement in fiscal year 1984. This change increased the net sales by $5.4 million. Harnischfeger changed to straight line depreciation of plants, machinery, and equipment. Prior to this they used accelerated methods of depreciation. This increased net income by $11 million. Harnischfeger reduced its inventory level from 1982 1984, resulting in a liquidation of
LIFO (Last In First Out) inventory. The company adjusted their bad debt allowances from 10% in 1983 to 6.7% in 1984.
This allowed for $2.9 million to net income. 2. What do you think are the motives of Harnischfeger’s management in making the changes in its financial reporting policies? Do you think investors will “see through” these changes? It seems clear that the motives of Harnschfeder’s management is to show profitability.
The senior leadership team is highly motivated to ensure stock price remains high.
They are looking for way to show higher profitability given the manufacturing sector big decline in the early 1980s. It seems that given the executive compensation plan, the senior executives stand the most to gain from after tax profits. In addition,
Harnischfeger had certain loan terms that required them to maintain minimum levels of cash and these changes were partially necessary to get them there. 3.
Assess the company’s future prospects given
Fa14 ACCT6350NT1
9/13/2014
Harnischfeger Case Analysis 1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these changes on the company’s 1984 reported profits.
Harnischfeger began to account Kobe Steel sales in US, previously it only added the gross margin on Kobe–originated equipment in the financial statement. As a result, both aggregated sales and cost of sales increased by $28 million. Harnischfeger Foreign consolidated subsidiaries are effectively included in the financial statement in fiscal year 1984. This change increased the net sales by $5.4 million. Harnischfeger changed to straight line depreciation of plants, machinery, and equipment. Prior to this they used accelerated methods of depreciation. This increased net income by $11 million. Harnischfeger reduced its inventory level from 1982 1984, resulting in a liquidation of
LIFO (Last In First Out) inventory. The company adjusted their bad debt allowances from 10% in 1983 to 6.7% in 1984.
This allowed for $2.9 million to net income. 2. What do you think are the motives of Harnischfeger’s management in making the changes in its financial reporting policies? Do you think investors will “see through” these changes? It seems clear that the motives of Harnschfeder’s management is to show profitability.
The senior leadership team is highly motivated to ensure stock price remains high.
They are looking for way to show higher profitability given the manufacturing sector big decline in the early 1980s. It seems that given the executive compensation plan, the senior executives stand the most to gain from after tax profits. In addition,
Harnischfeger had certain loan terms that required them to maintain minimum levels of cash and these changes were partially necessary to get them there. 3.
Assess the company’s future prospects given