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Harnischfeger Corporation

CHAPTER 3 OVERVIEW OF ACCOUNTING ANALYSIS
HARNISCHFEGER CORPORATION
1 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. i. Harnischfeger Corporation had changed from accelerated to straight-line method for computing depreciation expenses on plants, machinery and equipment in 1984.The cumulative effect is that net income for 1984 increased by $11 million or $0.93 per common and equivalent share. As a result, this change applied on all assets previously subjected to accelerated depreciation, which has an insignificant effect. But in long term, he changes in depreciation policy would cause higher depreciation costs, so the maintenance costs would be higher in the future.

ii. The company made a long-term contract about purchasing equipment with Kobe Steel, Ltd, As a result, the manufacturing costs are reduced, and both aggregate sales and cost of sales increased by $28 million. This change influenced on the quality of the earnings, which the profit margin was decreased to 1.44%.

iii. Harnischfeger Corporation changed the inventories method to LIFO, thus increasing net income by $2.4 million.

iv. Harnischfeger Corporation liquidated excess inventories and stretching payments to creditors. This can decrease the amount of debts and reduce the debts/equity ratio. As a result the company may get a unqualified audit opinion in future years and could extent their loan term.
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?
Management is given bonuses if the company has a profit, which provides an incentive for managers try their best to get maximum...

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