Hernischfeger Corporation Case Analysis
HERNISCHFEGER CORPORATION CASE ANALYSIS
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements
In 1984 they changed the depreciation method from accelerated methods to the straight-line for financial reporting purposes. This change included a adjustment of the residual values on certain machinery and equipment. They also included the products purchased from Kobe Steel, LTD and sold by them in their net sales. Moreover, they also included the financial statements of some foreign subsidiaries.
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? It increased the net income to 11 million for 1984. The straight-line method will allow the assets to continue to depreciate in the same amount for the life of the asset. This change will decrease profit in future years, because with the accelerated method, in the future years the depreciation expense would have been lower
3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
The depreciation live increase decreases the annual depreciation expense, which increase in future profits reported.
4. 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?
I think they were, because if they were experiencing a diminishment in sales this would also mean that they were giving less use to their machinery, and that would cause less wear and tear to the machinery justifying and increase on the useful life of the asset.
5. In Note 7, Harnischfeger describes the effect of LIFO inventory liquidation on its reported profits in 1984. Describe what is meant by LIFO
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements
In 1984 they changed the depreciation method from accelerated methods to the straight-line for financial reporting purposes. This change included a adjustment of the residual values on certain machinery and equipment. They also included the products purchased from Kobe Steel, LTD and sold by them in their net sales. Moreover, they also included the financial statements of some foreign subsidiaries.
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? It increased the net income to 11 million for 1984. The straight-line method will allow the assets to continue to depreciate in the same amount for the life of the asset. This change will decrease profit in future years, because with the accelerated method, in the future years the depreciation expense would have been lower
3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
The depreciation live increase decreases the annual depreciation expense, which increase in future profits reported.
4. 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?
I think they were, because if they were experiencing a diminishment in sales this would also mean that they were giving less use to their machinery, and that would cause less wear and tear to the machinery justifying and increase on the useful life of the asset.
5. In Note 7, Harnischfeger describes the effect of LIFO inventory liquidation on its reported profits in 1984. Describe what is meant by LIFO