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Financial Reporting And Analysis: Harnischfeger Case

1163 Words5 Pages

FIU ACG 6175 Financial Reporting and Analysis
2010 Florida International University
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
a. In 1983, Harnischfeger Corp included in its net sales products purchased and sold from Kobe Steel, Ltd. Previously, only the gross margin on Kobe-originated equipment was included.
b. Effective November 1, 1983, the financial statements of certain foreign subsidiaries are included on the basis of their fiscal years ended July 31. This change had the effect of increasing net sales.
c. In 1984, the corporation changed the depreciation method used previously to expense plant, machinery, and equipment to the straight-line depreciation …show more content…

Note 9, on page 216, states that Harnischfeger decreased R&D expense 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?
a. I believe Harnischfeger Corp’s decision to reduce R&D expenses was absolutely motivated by business considerations. They cut their research and development expenses dramatically in 1984 to $5.1M from $12.1M in 1983. This significantly increased their operating profit. This company was in trouble, so this move was a necessary one to sustain their business.
8. Note 11 describes a number of changes in Harnischfeger’s pension plans in 1984. Describe these changes as clearly as you can. What are the economic consequences of these changes to Harnischfeger and its workers?
a. Harnischfeger Corp first reduced its pension plan expense to 1.9M, from 6.5M in 1983, a reduction of $4.6M. The Corp restructured their plan in 1984 due to overfunding of the plan. The corporation purchased annuities at a cost of $36.7 million and reverted the remaining $39.3M of plan assets to cash to the company. The $39.3M actuarial gain from the restructuring is being amortized to income over a ten-year period, which helps pad future …show more content…

Under the new pension plan, the employee’s pension benefits decrease, while the corporation’s net income increases. This may increase future pension costs in the long-run.
9. How did the pension plan changes affect Harnischfeger’s financial statements in 1984? Are these changes likely to affect future profits?
a. Overall, the plan changes had a positive impact on Harnischfeger’s financial statements in 1984, and with the amortization of reverted cash will help profits in future years.
10. Summarize all the accounting changes Harnischfeger made in 1984 and their effects on pre-tax profits and cash flows in 1984.
>Added net sales of $28M from products purchased from Kobe Steel in 1984
>Added financial statements of certain foreign subsidiaries. This increased net sales by $5.4M in 1984.
>Changed depreciation method from accelerated to straight-line, which increased net income for 1984 by $11M.
>Reduced Pension Plan Expense by $4.6M
>LIFO liquidation increased net income by $2.4M and reduced Net Loss by $15.6M
>Increased Bad Debt Reserve by $2.1M
>Reduced R&D Expense by more than $7M

11. Accounting statements are used by investors, lenders, customers, employees, and governments in dealing with Harnischfeger. Among these groups, who is most likely to “see through” the above accounting changes, and who is least likely to do

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