Take Home Assignment-Harnischfeger

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Case Study: | Harnischfeger Corporation | | |

Q1: Changes in accounting policy and accounting estimates. (i) Inclusion of full sales price of construction and mining equipment purchased from Kobe Steel, Ltd. (later resold by the Corporation) in net sales
If the Corporation continued with the prior recognition, which was to recognize gross margin, a loss of $5.7 million would be reflected in net sales. However, under the new recognition method no loss would be recorded, instead, revenue increased by $28 million arising from such sales. No impact would be on pre-tax profits as the cost of purchase of the equipment would be recorded in Cost of Goods Sold (COGS), hence $5.7 million loss resulted from such sales was still accounted
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Earnings management is the use of accounting techniques, such as change in accounting policies and accounting estimates, with an objective to create an optimistic outlook (sometimes overly optimistic) of a company’s business activities and financial position. Although to some it may seem like it is earnings fraud, earnings management actually took benefit from the flexibility and the legitimateness (within the framework of Generally Accepted Accounting Principles (GAAP)) of accounting rules to manipulate revenue and expenses recognition.

Companies practice earnings management to maximize/minimize earnings or to smooth out fluctuations in earnings (or more commonly known as income smoothing). The motivation can be derived from two sources: (i) contracting incentives, also known as Positive Accounting Theory (PAT), and (ii) capital market incentives, which is to meet earnings

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