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 …show more content…
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
If the depreciation method changes from straight-line method to accelerated method then, depreciation expense would be increase and net income would decrease. The EPS ratio would represent a loss of $0.19 per share.
In Note 7, Harnischfeger describes the effect of LIFO inventory liquidation on its reported profits in 1984. Describe what is meant by LIFO liquidation and how liquidation affects a company’s income statement and balance sheet.
I believe that this action was motivated by business considerations, since the accounting practices were not the best. 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. As such, this made profits look positive.
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.
The first change that we demonstrated was the percentage increase in sales. For 1993 we looked at a range of sales increases from 5% up to 15%, with 10% being the amount that the company forecasted. Once we completed this table we modeled a graph from the results and found that the results from changing the sales growth percentage we not all that sensitive when computing the effect on net income:
During 1992, Hanson’s share of industry sales was 12% for type 101, 8% for 102, and 10% for 103. The industry wide quoted selling prices were $9.41, $9.91, $10.56, respectively. Wessling order no immediate changes, however he advice to wait for results of the first half of 1993. He instructed the accounting department to provide detailed expenses and earnings statements by products for 1992. In addition, he requested an explanation of the nature of the costs including their expected future behavior (exhibit 3). For control purposes, he had the accounting department prepare monthly statements using as standard costs the actual costs per cwt. from 1992 profit and loss statement (exhibit 2).
Prior to 1984, the Corporation used principally accelerated methods for its U.S. operating plants. The cumulative effect of this change, which was applied retroactively to all assets previously subjected to accelerated depreciation, increased net income for 1984 by $11.0 million or $.93 per common and common equivalent share.
Harnischfeger’s corporate recovery plan was a four pronged approach that involved (1) changes in top management, (2) cost reductions to lower the break-even point, (3) reorientation of the company’s business and (4) debt restructuring and recapitalization. These changes at first glance appear to have allowed Harnischfeger to improve its financial performance from a net loss of $3.49 per share in 1983 to a net gain of $1.28 per share in 1984. In addition, Harnischfeger has appeared to have achieved a majority of its desired outcomes from each of its four changes as shown below.
Net income per common share – assuming dilution increased approximately four percent reflecting the impact of additional common shares issued, increased interest expense, and increased merger and integration costs, all related to the Folgers transaction.
I will use Paladin Energy Ltd. to explain how this is done. Paladin Energy Ltd. is a company that produces uranium, and is based in Western Australia. It is also listed on ASX, and they are currently operating in Malawi, Africa. Previously, Paladin Energy Ltd. represented the exploration and evaluation expenditure against profit and loss. Now, they capitalize this expenditure as an asset. They adopted this new accounting policy on 31st March 2011. The previous policy has accounted
The result of all the reductions of expenses on the revenues, takes us to the Net Earnings. This account reflects $12,266, $683 less than in 2008, but $1,690 more than 2007.