Harnischfeger Corporation
Financial Reporting & Analysis April 19th, 2013
Case Study- Harnischfeger Corporation
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
The accelerated depreciation method was changed from to straight-line on all company assets that caused to increase after-tax net income for 1984 by $11.005 million. The cumulative effect of change in 1984 there will be no reduction in the depreciation expense due to change.
in 1984 decreased by $7.0 million over the previous year. Most of this reduction was a result of the company's agreement with Kobe Steel, Ltd. Under this agreement, Kobe agreed to reimburse Harnischfeger up to $17.0 million dollars of R&D expense over a period of three years. However, some students argue that Harnischfeger may be cutting its research budget since the actual reduction in Harnischfeger's 1984 R&D expense is more than one-third of this amount. (See Exhibit 4, Notes 6 and 9, in the case.)
8. Effective 1984, Harnischfeger began to include in its net sales products purchased from Kobe Steel, Ltd., and sold to third parties by Harnischfeger. Previously only the gross margin on Kobe-originated equipment was included in Harnischfeger's financial statements. This increased Harnischfeger's sales in 1984 by $28.0 million but had no impact on its profits. Some students would mistakenly argue that this had an impact on Harnischfeger's net income. (See Exhibit 4, Note 2, in the case.)
Although some of the above are pure accounting decisions with no direct cash-flow consequences, the other decisions affect the company's reported profits as well as its cash flow. The instructor should ask the class to identify the latter-type decisions among the above.
Discussion of Question 2
The above analysis shows that most, if not all, of the reported profits of Harnischfeger in 1984
Case Study- Harnischfeger Corporation
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
The accelerated depreciation method was changed from to straight-line on all company assets that caused to increase after-tax net income for 1984 by $11.005 million. The cumulative effect of change in 1984 there will be no reduction in the depreciation expense due to change.
in 1984 decreased by $7.0 million over the previous year. Most of this reduction was a result of the company's agreement with Kobe Steel, Ltd. Under this agreement, Kobe agreed to reimburse Harnischfeger up to $17.0 million dollars of R&D expense over a period of three years. However, some students argue that Harnischfeger may be cutting its research budget since the actual reduction in Harnischfeger's 1984 R&D expense is more than one-third of this amount. (See Exhibit 4, Notes 6 and 9, in the case.)
8. Effective 1984, Harnischfeger began to include in its net sales products purchased from Kobe Steel, Ltd., and sold to third parties by Harnischfeger. Previously only the gross margin on Kobe-originated equipment was included in Harnischfeger's financial statements. This increased Harnischfeger's sales in 1984 by $28.0 million but had no impact on its profits. Some students would mistakenly argue that this had an impact on Harnischfeger's net income. (See Exhibit 4, Note 2, in the case.)
Although some of the above are pure accounting decisions with no direct cash-flow consequences, the other decisions affect the company's reported profits as well as its cash flow. The instructor should ask the class to identify the latter-type decisions among the above.
Discussion of Question 2
The above analysis shows that most, if not all, of the reported profits of Harnischfeger in 1984