Inventac Case

1. Identify all the accounting policy changes and the accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these on the company´s 1984 reported profits.

a. Changes that affect the Harnischfeger Revenues:

• The company start to account Kobe Steel sales in US, previously it only add the gross margin in the financial statement. (this sales represents $28 millions)

• Sales to a foreign subsidiary starts to be consolidated as a net revenues (this sales represents $5,4 millions)

b. Changes that affect the Harnischfeger profitability:

• Change in the depreciation accounting method from principally accelerated methods to straight line methods. Although there was no significant reduction in depreciation expense in 1984, this change has brought about an increased after tax net income by $11m.

• Change on the company’s net residual value. Increased net income in $ 3,4 millions

c. Inventories Liquidation:

• The company had a $ 2,4 million increase in its net income, as a result of LIFO inventory liquidation.

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?

It seems that the company had a better accounting result, not a better “operating” result. In order to report a better financial Statement (and increase its bonus based on accounting net income) the management decrease depreciation “levels”, increase revenues and switch inventories method of accounting. Changing the financial reporting policies can easily make financial report looks a lot profitable. Then to make company borrow many from company, attract investor easier. Also