Harnischfeger Corporation
1. Read the footnotes carefully. Identify four accounting policy changes and accounting estimates that Harnischfeger made during 1984 and estimate as accurately as possible the effect of these changes on the company’s 1984 reported profits?
One accounting change that Harnischfeger made was that they were going to include products purchased from Kobe Steel in their net sales. Before November 1, 1983 only the gross margin on Kobe products was included in their net sales. Harnischfeger was also going to include the financial statements of certain foreign subsidiaries were included on the basis of their fiscal years ended July 31 to September 30. Even though there was no significant impact on net income, this did help to increase their net sales by $28 million from Kobe Steel and $5.4 million from foreign subsidiaries.
A second accounting change that Harnischfeger made was that they were going to change their method for computing depreciation expense on plants, machinery, and equipment to the straight-line method. Before 1984, Harnischfeger used the principally accelerated method for all US operating plants. This was then applied retroactively to all assets previously subject to the accelerated depreciation. The cumulative effect of this change increased net income by $11 million.
A third accounting change that was made was that because of the new depreciation method being used they changed their estimated useful lives on certain US plants, machinery, and equipment. They also had to change the residual value on certain machinery and equipment. This also helped to increase their net income in 1984 by $3.2 million.
A final accounting change that Harnischfeger made was their inventory method. They changed from using the FIFO method to LIFO in 1984. Once this change was made the inventories that were valued using LIFO way made up about 82% of total inventories. The inventory reductions led to a liquidation of LIFO inventory that were carried at a lower cost.
One accounting change that Harnischfeger made was that they were going to include products purchased from Kobe Steel in their net sales. Before November 1, 1983 only the gross margin on Kobe products was included in their net sales. Harnischfeger was also going to include the financial statements of certain foreign subsidiaries were included on the basis of their fiscal years ended July 31 to September 30. Even though there was no significant impact on net income, this did help to increase their net sales by $28 million from Kobe Steel and $5.4 million from foreign subsidiaries.
A second accounting change that Harnischfeger made was that they were going to change their method for computing depreciation expense on plants, machinery, and equipment to the straight-line method. Before 1984, Harnischfeger used the principally accelerated method for all US operating plants. This was then applied retroactively to all assets previously subject to the accelerated depreciation. The cumulative effect of this change increased net income by $11 million.
A third accounting change that was made was that because of the new depreciation method being used they changed their estimated useful lives on certain US plants, machinery, and equipment. They also had to change the residual value on certain machinery and equipment. This also helped to increase their net income in 1984 by $3.2 million.
A final accounting change that Harnischfeger made was their inventory method. They changed from using the FIFO method to LIFO in 1984. Once this change was made the inventories that were valued using LIFO way made up about 82% of total inventories. The inventory reductions led to a liquidation of LIFO inventory that were carried at a lower cost.