Business Analysis & Valuation
Harnischfeger Corporation
Harvard Business School Case #186-160 Question No. 1:
During the year 1984, Harnischfeger changed the following accounting policies and estimates:
• Revenue recognition criteria of some parties changed during the year that resulted in change of revenue. From November, 2013 purchases form Kobe Steel, Ltd. started to be included in net sales. The products from the given company are resold by Harnischfeger. Formerly, only the margins on the given products formed part of financial statements. This escalated the sales during the fiscal year by $ 28 Million.
• The company changed Fiscal year of one of the foreign subsidiary, ending period on 30th September rather than 31st July.
…show more content…
Depreciation method was changed to straight line method from accelerated method. This policy change increased the income of year 1984 by $ 11 Million.
• The Last in first out (LIFO) liquidation Inventory valuation method was changed as Inventory level in1984, 1983 and 1984 was decreased by Harnischfeger. By adopting this process, inventory that was purchased at lower cost in previous years was sold at higher prices.
• The company reworked the allowance for doubtful accounts. The allowance was decreased 10% of sales for 1983 to 6.7% of sales for 1984.
• The company curtailed its Research and Development expense by 98.7%. To be exact, expenses were decreased from $ 412.1 Million in 1983 to $ 5.1 Million in 1983
• Harnischfeger modified employees’ pension plans. A new salaried employees’ retirement plan was designed and the old one was aborted.
The changes in the above given accounting policies and estimates, affected the reported profits as follows:
• Change in revenue criteria increased both sales and cost of sales by $ 28 Million. The profit margin was decreased from 1.55% to
…show more content…
• The decrease in research and development expenses increased operating profit by $ 9.1 Million.
• Modified employees’ pension plan resulted in positive cash flows, decreased pension expense by $ 14 Million and increased net income by $ 3.9 Million.
Question No. 2:
Harnischfeger management intent to show profits in 1984, that’s the prime reason behind the change in accounting policies. Company is going to celebrate its century of business inception. Company want to validate the investors that company is operating in a better way.
Executive incentive plan has motivated the management to bring changes as the plan says that if the company achieves the target of net after tax profit, 11 senior executive officers will be given incentive compensation of 40% of annual salary.
The other motives of changes in accounting policies are: To improve their goodwill and reliability; To inflate the prices of shares that would lead to the possibly increase capital; Avoiding debt covenant restrictions as the lender’s agreement states a minimum limit of term loan of cash and unpledged receivables, working capital and net worth.
Question No.
Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
In 1984, Harnischfeger’s reported profits during each of the four quarters, ending the year with a pre-tax operating profit of $5.7 million and a net income after tax and extraordinary credits of $15 million. So I think that this action was motivated by business considerations, since the accounting practices were not the best. These actions made profits look positive.
* We decreased this cost as a percent of revenue 1.5% below the previous year for all forecasted periods
For years 1983-1985, additional corporate assessment expense was given. This would lower Polymold’s earnings on their income statement. Another piece of data that was given is research and development expense. Without the CAD/CAM investment, research and development expense is $130,000. This is double to $260,000 without the CAD/CAM investment. This would lower earnings. We are also given the savings that the investment would yield. Without the CAD/CAM investment, there would still be savings – but not as much as with the CAD/CAM investment, which is due to the depreciation of the equipment and tax credits.
10. Summarize all the accounting changes Harnischfeger made in 1984 and their effects on pre-tax profits and cash flows in 1984. Below are the changes that were made in 1984: Change in Sales recognition strategy with Kobe Steel - No net effect on pre-tax profits and cash flows in 1984; Change in reporting period for certain foreign subsidiaries - No net effect on pre-tax profits and cash flows in 1984; Change in Pension plan - Increased pre-tax profits and cash flows in 1984; Change in bad debt allowance ratio - Increased pre-tax profits and cash flows in 1984; Reduction in R&D expenses -
When using the LIFO method, if sales are higer than current purchases inventory not sold may be liquidated. This is called LIFO liquidation. The effect of the LIFO liquidation on the Harnischfeger’s income statement is an increase in net income by $2.4 million or $.20 in fiscal year 1984. There is no income tax effect. On the balance sheet there is a decrease of inventory, due to liquidation.
What were the factors that caused actual quarterly income to be less than budgeted? What was the quantitative effect of each of these factors?
Harnischfeger also included the products purchased from Kobe Steel, LTD and sold by them in their net sales instead of stating only the gross margin per unit. They also included the financial statements of some foreign subsidiaries.
There was a change in the recognition of some types of sales. This resulted in a change in sales calculation. Harnischfeger incorporated products purchased from Kobe Steel, which were re-sold by the company, into its net sales. This increased aggregate sales and cost of sales by $28 million.
Answer: Comparing the direct labor and overhead costs from 1988 and 1989 the actual savings were 270% (as detailed in Table 1)
Some of the significant changes I found on the income sheet were revenue which decreased by 8 million dollars in 2015 compared to 2014. SG&A expenses increased by .9% for the year. How-ever gross profit decreased by .3% in 2015. Also net income for the year decreased by -2.5% per-cent.
For pensions and post-retirement accounting methods to recognize the benefit costs, estimates and assumptions on future events ascertaining the timing and amount of benefits payments must be sought first. This paper seeks to compare and contrast the early historical accounting for pensions and post-retirement healthcare and life insurance benefits with the rules and guidance applied today in addition to the changes to such guidance and rules that would improve the accounting and reporting of such benefits depending on the business and political changes and as such, predict the effect of such changes on financial reporting and accounting practices.
ii. From July 1, 1986 to March 31, 1993 the depreciation was Straight line at 10% for 15 years for a salvage value of 10%.
In the main quarter, Target detailed balanced profit of $1.29 versus $1.10 a year ago or $1.02 versus $1.01 on a GAAP
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.