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The Harnischfeger Case Essay examples

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ACC 613
Chapter 3: Harnischfeger Case

1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these on the company's 1984 reported profits.

Harnischfeger made the following accounting policy changes and accounting estimates during the year 1984.

• 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.
• There was a change in the fiscal year for some foreign subsidiaries.
• There was a
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Overall, depreciation changes resulted in an increase of $3.2 million in net income in 1984.
• The effect of LIFO inventory liquidation was an increase in 1984 net income by $2.4 million, as gains. The balance sheet also reflected an improvement in liquidity.
• The effect of the change in the allowance for doubtful accounts was that it resulted in $2.9 million in operating income for 1984.
• The effect of the change in R&D expenses was an increase in operating profit by $9.1 million.
• The effect of the change in pension plans was a reduction in pension expenses by $14 million, increase in net income by $3.9 million, and a positive cash flow.

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?

• The principal motive for the Harnischfeger management was to show profit in 1984. This was necessary since the company was preparing to celebrate 100 years of doing business and management was eager to prove to investors that the company was doing well. Management was also motivated by incentive compensation; the board of directors established an Executive Incentive Plan which provided an incentive compensation opportunity of 40% of annual salary for 11 senior executive officers only if the Corporation reached a specific net after-tax profit objective
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