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Harnischfeger Corporation

Submitted To Submitted By

Dr. Shikha Bhatia SHREYA

Ques 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.

Ans) Following are the accounting policy changes and accounting estimates that Harnischfeger
made during 1984 :

a) The company start to account Kobe Steel sales in US, previously it only add the gross
margin in the financial statement. As a result, both aggregate sales and cost of sales
increased by $28 million.

b) Foreign consolidated subsidiaries are effectively included in the financial statement in

fiscal year 1984. [This change increased the net sales by $5.4 million.(tax)].

c) Change in the depreciation accounting method from accelerated to straight line method.
Increase of $11 million in 1984 income.

d) Harnischfeger reduced its inventory level in 1984, 1983 and 1982, resulting in a
liquidation of LIFO inventory. This liquidation process led to gains when inventory,
acquired at a lower cost in the earlier years, were sold at a higher price, resulting from
higher inflation.

e) Harnischfeger, for some reasons, adjusted its allowance for doubtful accounts to 6.7% of
sales for 1984 from 10% of sales in 1983, resulting in $2.9 million in operating income
for 1984. The company might try to increase sales by aggressively extending credit to
doubtful customers, risking losing all of relevant sales. This is very skeptical as
Harnischfeger gives no explanation.
Ques 2) What do you think are the motives of the management in making changes in its financial
reporting policies?

Ans) The changes in the accounting and financial reporting polices have been done in order to
get back on track after the financial crisis of 1982. The worldwide recession caused a huge drop
in Harnischfeger’s sales. Unfortunately, this drop happened just after a period of strong growth
in which the company also increased its debt. Once the crisis hit, those high debts created a
serious financial instability for Harnischfeger Corporation. As a result, the changes in the
accounting policies, the pension fund structure, as well as the cost cutting in the R&D
department were all done for the following reasons:

a) These changes are directly related to the profit of the financial year. After the changing,
the financial figure from loss to profit, which is the investors prefer to look.
b) Brand improvement.
c) The increase in stock prices would lead to the opportunity to raise new capital.
d) Three-year term loan agreement with its lenders required specified minimum levels of
cash and unpledged receivables, working capital and net worth.

Ques 3) Assess the company’s future prospects using your insights from question 1 & 2 and the
information given in the case on the company’s turnaround strategies.

Ans) The company can operate more profitable in the future than what it got in 1982,1983 and
1984. It found a great strategy such as reducing workforce, closing plants losing money and
reorientation its business by developing and acquiring new products, technology and equipment
and expanding its ability to computer-integrated products and solutions. The financial
surroundings are much better now than before because its successful issuing of new stock and
corporate bonds.

As concerning the R&D, the company has a strategy to get into new technology however, the
R& D expenditure does not match with this objective

From the limited source of information, we are not sure about this company’s competitive
position in the computer-integrated products and solutions, which it will focus on in the future