Eli Lilly Ratio Analysis
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
• Harnischfeger included net sales figure from Kobe Steel Ltd. Previously, only net gross margin generated from transactions with Kobe Steel Ltd was included. As a result, net sales figure increased by $28 million.
• Harnischfeger incorporated certain foreign subsidiaries’ financial statements with fiscal year ending 31st July. The adjustment resulted in a net sales figure increase of $5.4 million for the year ended on 31st Oct.
• Harnischfeger adopted straight-line method for financial reporting purposes and abandoned previously used accelerated method for its US operating plants.
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?
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life by changing the depreciation method to straight line method the economic life of the asset was increased then depreciation expense was lowered resulting in higher net income. This change resulted in an increase of net income by $11.0 million attributed to the change of depreciation method. The overall impact of this accounting change on future years will be that the net profits will decrease because with the accelerated method, in the future years the depreciation expense would have been lower, and with the straight line they will continue to depreciate in the same amount for the life of the asset.
3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
As result of the change in depreciation policy, the company also reviewed on depreciation lives on certain PPE in US. $3.2 million resulted from the change on depreciation lives. The increase in total, including the increase as a result of the change of depreciation method and depreciation on lives
• Harnischfeger included net sales figure from Kobe Steel Ltd. Previously, only net gross margin generated from transactions with Kobe Steel Ltd was included. As a result, net sales figure increased by $28 million.
• Harnischfeger incorporated certain foreign subsidiaries’ financial statements with fiscal year ending 31st July. The adjustment resulted in a net sales figure increase of $5.4 million for the year ended on 31st Oct.
• Harnischfeger adopted straight-line method for financial reporting purposes and abandoned previously used accelerated method for its US operating plants.
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?
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life by changing the depreciation method to straight line method the economic life of the asset was increased then depreciation expense was lowered resulting in higher net income. This change resulted in an increase of net income by $11.0 million attributed to the change of depreciation method. The overall impact of this accounting change on future years will be that the net profits will decrease because with the accelerated method, in the future years the depreciation expense would have been lower, and with the straight line they will continue to depreciate in the same amount for the life of the asset.
3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
As result of the change in depreciation policy, the company also reviewed on depreciation lives on certain PPE in US. $3.2 million resulted from the change on depreciation lives. The increase in total, including the increase as a result of the change of depreciation method and depreciation on lives
References: Palepu, K. G. (1985, November 27). Harnischfeger Corporation. Harvard Business School, 23. Retrieved from http://http://hbr.org/product/harnischfeger-corp/an/186160-PDF-ENG?Ntt=%20harneschfeger Vartan, V. G. (1984, June 8). Market Place; Analysts Favor Harnischfeger. The New York Times. Retrieved from http://http://www.nytimes.com/1984/06/08/business/market-place-analysts-favor-harnischfeger.html Markgraf, B. (n.d.). What Is a LIFO Liquidation? The Houston Chronicle. Retrieved from http://http://smallbusiness.chron.com/lifo-liquidation-51049.html Bank, E. (n.d.). The Effects of LIFO Liquidation on Balance Sheets. The Houston Chronicle. Retrieved from http://smallbusiness.chron.com/effects-lifo-liquidation-balance-sheets-67480.html