Harnischfeger

Case Analysis: Harnischfeger

Harnischfeger made a number of accounting policy changes that affected their financial statements and reported profits from 1983 to 1984. Here is a list of changes found on Financial Notes 2 and 7 of the Harnischeger case and their cumulative affect on net profit:

1. Harnischfeger includes net sales from products purchased by Kobe Steel, Ltd. Previously only gross margin of Kobe-originated equipment was included. This change increased sales $28 million.

2. Foreign subsidiaries were included on the basis of fiscal years ended July 31. This increased net sales by $5 million.

3. Harnischfeger previously used an accelerated method for calculating depreciation on capital expenditures (plans, machinery and equipment). In 1984 they changed to use a straight-line method. This increased Net Income by $11 million. This additionally affected estimated depreciation on US plants, machinery and equipment, increasing Net Income $3.2 million.

4. Harnischfeger changed to use the LIFO inventory (last in first out) method to help liquidate some of their inventory assets. The affect on this liquidation increased Net Income by $2.4 million.

5. There were a number of other financial based decisions made that affected Net Income, but there weren’t necessarily accounting changes. Changes such as cutting research and development costs by nearly half (used Kobe Steel, Ltd), adjusting salaried and hourly wages, pensions and benefits,

The cumulative affect on accounting changes was roughly $50 million in increased Net Income (profit).

Management’s objective is to paint the best possible picture on their financial statements, while still maintaining coherence with GAAP. Since Harnischfeger was a publicly traded company, they were trying to attract investors. They raised a substantial amount of money from a public offering of common stock in 1984. Proceeds from the public offering were used to pay off all their restructured debt. Clearly...