ACCT5910 Business Analysis and Valuation
Summary of Case
This case is talking about Harnischfeger Corporation, leading producer of Construction Equipment, Mining and Electrical Equipment, Material Handling Equipment and Harnischfeger Engineer, based in Milwaukee, Wisconsin.
The main topic of this case is the accounting policy changes after financial difficulties and its effect on financial reporting and the motive of these changes.
1. Identify all 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 profit.
Harnischfeger made the following accounting ...view middle of the document...
Also, profit margin dropped from 1.55% to 1.44%, which represented a 7.1% change in profit margin.
- By changing the fiscal year of foreign subsidiaries (ending period of September 30 instead of July 31), the effect was the lengthening of the 1984 reporting period for the subsidiaries from 12 months to 14 months. This increased sales by $5.4 million.
- The effect of the change in depreciation method (straight-line method) was a net income of $11 million realized in 1984. 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 for the year. Management...