Harnischfeger Case

This is evidence the company is having problems making profit. Haefren needs to address is the delinquency of their customers’ accounts, from 93 to 95, days sales outstanding have increased to 77 days, which is a lot higher than the 30-day monthly installment terms. The company is not stringent in collection efforts but this can be because of the economic condition in Germany. The company does not manage its assets very well. Its decrease in fix asset turnover from 6.98 in 1993 to 5.39 in 1995 can be because of their decrease in sales, but the low total asset turnover which is also decreasing from 2.1 to 1.5 prove that their assets are not being used very efficiently. Since sales are decreasing and competition increases their inventory days has also increased from 103 to 129 which again could cause low price. The company is already experiencing a loss of revenue due to the fact they lowered price because of economic condition.

Based on the financial statements in 1984 Harnischfeger made changes from the previous year, the corporation computed depreciation expenses on plants, machinery and equipment using the straight-line method. Prior to the accounting changes in 1984, the company had experienced some financial losses was able to recover. There has been a change in depreciation accounting when it comes to profit. Before they used to apply the accelerated methods for the operating

Note 9 indicates that Harnischfeger decreased its R&D expense considerably in 1984 relative to the previous two years. Do you think this change was motivated by business considerations or accounting considerations? How did this change affect the company’s reported profits in 1984?

LIFO was the hardest for me to grasp because of the logic and that it could provide a tax break for the company. I had trouble understanding the concept of the LIFO because I kept thinking of the concept backwards. I also had a hard time understanding the tax break because I didn’t understand why it happened. After reading the material again I noticed that where costs of inventory become high over time the LIFO method created a condition in which the less expensive inventory was recorded. This showed that the more expensive items were recently purchased creating a lower profit and a smaller income that could be taxed.

Even though Mr. Fordham mentions that he in his “Statement of Cost of Goods Manufactured for Year Ended Dec. 31 1956” that he depreciated $24,000 of Plant and Equipment, I decided to change the depreciation schedule so that PP&E would be fully depreciated by the end of the 5 year period. Thus, I used a straight-line depreciation schedule that accumulated $40,000 worth of depreciation per year, which was spread evenly across the 12 months of this Balance Sheet (or $3,333.33 per month).

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.

1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. In the 1984 the corporation computed depreciation expense on plants, machinery and equipment by using the straight-line method for financial reporting purposes. These changes were made to provide a more equitable allocation of the cost of the plants.

For an S corporation converted from a C corporation, it shall recognize the LIFO recapture amount, which is the excess of FMV on the first day of S year over the adjusted basis, by including it in the gross income of the last C corporation year.

Note 2 (pg. 17) states that in 1984 Harnischfeger changed their depreciation method that was being used to expense their plants, machinery and equipment from the direct method to the straight-line method for financial reporting purposes. An adjustment of the residual values on certain machinery and equipment was made.

2. What do you think are the motives of Harnischfeger's management in making the changes in its financial reporting policies? Do you think investors will see through these changes?

• In 1993 cost of goods sold being 90% of sales and 9.6% gross profit of sales. Company’s lack of ability to manage inventory and lack of cash forced them to order from more expensive (12-15%more) warehouse than steel mills.

Candidate Hargrove did a great job during this evaluation. SNC’s brief was excellent. He covered every paragraph of OSMEAC, briefed with a high amount of confidence and was methodical in his issue. SNC had a clear plan going into the execution, and managed his fire team well throughout. SNC maintained a calm demeanor and bearing, even when he faced friction. He evaluated the problem at decision points, thought through the problem, and gave solid direction to his fire team. Candidate Hargrove was clearly in charge of his team, leading them with a powerful demeanor and confidence. Communication was outstanding within the entire team, and SNC fostered their actions as those of a cohesive unit. Candidate Hargrove was able to make decisions,

For the depreciation part, we adopted the straight-line method. Here since the depreciation of year 1984 was $1270, we just assumed all the depreciation amount to be equal to $1270 till the year 1989. With all of these previous assumptions, we obtain the complete pro forma financial statement and the cash flow table for the Collinsville Plant.

3. Assuming the average value of flight equipment that Delta had in 1993, how much of a difference do the depreciation assumptions it adopted on April 1, 1993 make? How much more or less will its annual depreciation expense be compared to what it would be were it using Singapore’s depreciation assumptions?

a) Harnischfeger computed depreciation expense on plants, machinery and equipment using the straight-line method for financial reporting purposes. Prior to 1984, the Corporation used principally accelerated methods for its U.S. operating plants.