Harnischfeger Corporation Case

Q1: 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.

1. The financial statements of certain foreign subsidiaries are included, for example, the corporation includes in its net sales products purchased from Kobe Steel, Ltd, while previously only the gross margin were included. This change has the effect on increasing net sales(by 5.4 million), and insignificant impact on net income.

2. The calculation of depreciation method is changed from accelerated depreciation method to straight line method for financial reporting purposes. This change had lead to a reducing of the current year’s depreciation expense, and the increasing of net income (11 million).

3. The corporation values its inventories at the lower of cost or market and the cost is determined by the last-in, first-out(LIFO) method. LIFO inventory liquidation results in an increase in net income (2.4 million) or $.20 per common share in fiscal 1984.

4. The fiscal periods adopted by the subsidiaries have changed that the fiscal year ending is changed from in July 31 to in September 30. The effect of this change on profits has not reported.

5. R&D Expenditure has decreased from 12.1 million in 1983 to 5.1million in 1984. Obviously, this change will affect the future growth of the company.

6. The rate of return assumption which is used to determine the pension expense changed (9% in 1984 and 8% in 1983).

Q2: what do you think the motives of Harnischfeger’s management in making the changes in its financial reporting policies? Do you think investors will see through these changes?

1. The company may want to build a good financial image by changing its financial reporting policies, especially the company celebrates its 100th birthday on December 1984. The good performance