Harnischfeger free essay sample

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. 2. What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years? Harnischfeger new method was insignificant; the changes were noted as an increase in net income by $11 million or $. 93 per common and common equivalent share. 3. What is the effect of the depreciation lives change? How will this change affect future reported profits? The corporation has changed its estimated depreciation lives on certain U. S. plants, machinery, and equipment, which increased net income for 1984 $3. 2 million or $. 27 per share. 4. The depreciation accounting changes assume that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly. We will write a custom essay sample on Harnischfeger or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Given the business conditions Harnischfeger was facing in its primary industries in 1984, are these economic assumptions justified? The consolidation of the statements of the operations indicates that the revenue in 1983 was declining as well as the uses of assets. 5. 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. If a company decides to perform a LIFO liquidation, the old costs will be matched with the current higher sales prices. Thus, a cost to using the LIFO liquidation method is higher tax liability if prices have risen since LIFO was adopted. The expected tax advantage of LIFO turns into a disadvantage because older, lower costs (of older inventory) are matched with current revenues. Another cost may be lost sales. The LIFO liquation on Harnischfeger net income has increased by $2. 4 million or $. 20 in fiscal year 1984. 6. Note 8, states Harnischfeger’s allowance for doubtful accounts. I believe this was a business strategy. Unfortunately their profit declined from the previous year ($5. 3 million). 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? * The company changed its rate of return for determining pension expense. The rate 1984 rate was of 9% compared to 8% in 1983 and 7. 5% in 1982. * Harnischfeger restructure the pension plan, this action allowed them to educe the pension about $4. 0 million in 1984. * The company recaptures $39. 3 million in excess plan assets from the pension plan restructuring and led to a $3. 93 million pretax gain in 1984 The economic consequence to Harnischfeger and his workers are that they will only fund at the minimum the required under the ERISA of 1974. 9. How did the pension plan changes affect Harnischfeger’s financial statements in 1984? Are these c hanges likely to affect future profits? Harnischfeger changes in the pension plan: * Net income increased by $3. million * The pension expense was reduced in 1984 by $4 million * Last, Harnischfeger was able report positive cash flow I do not foresee Harnischfeger being affected with their new alignments. Reason being, is because they were well over-funded. The over funding most likely came from the restructuring in 1983 of 45% workforce. In fact, the new pension plan would increase the minimum pension benefits. 10. Summarize all the accounting changes Harnischfeger made in 1984 and their effects on pre-tax profits and cash flows in 1984. Below are the changes that were made in 1984: Change in Sales recognition strategy with Kobe Steel No net effect on pre-tax profits and cash flows in 1984; Change in reporting period for certain foreign subsidiaries No net effect on pre-tax profits and cash flows in 1984; Change in Pension plan Increased pre-tax profits and cash flows in 1984; Change in bad debt allowance ratio Increased pre-tax profits and cash flows in 1984; Reduction in Ramp;D expenses Increased pre-tax profits and cash flows in 1984; Change in depreciation method from accelerated to straight-line – Increased pre-tax profits and cash flows in 1984; Extension of depreciate lives Increased pre-tax profits and cash flows in 1984; Liquidation of LIFO inventories and Increased pre-tax profits and cash flows in 1984; 11. Accounting statements are used by investors, lenders, customers, employees, and governments in dealing with Harnischfeger. Among these groups, who is most likely to â€Å"see through† the above accounting changes, and who is least likely to do so?