Essay about Harnischfeger

1553 Words May 19th, 2012 7 Pages
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.

Note 2 (pg. 17) states that in 1984 Harnischfeger changed their depreciation method that was being used to expense their plants, machinery and equipment from the direct method to the straight-line method for financial reporting purposes. An adjustment of the residual values on certain machinery and equipment was made.
Harnischfeger also included the products purchased from Kobe Steel, LTD and sold by them in their net sales instead of stating only the gross margin per unit. They also included the financial statements of some foreign subsidiaries.

2. What is the effect of the depreciation accounting method change
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Given the business conditions Harnischfeger was facing in its primary industries in 1984, are these economic assumptions justified?
Yes, it is justifiable since in the Consolidated Statement of Operations, revenues went down to $398,708 in 1984 from $447,461 in 1982. Meaning that if Harnischfeger was experiencing a diminishment in sales, this would give less use to their machinery, and that would cause less wear and tear to the machinery justifying and increase on the useful life of the asset. This should only be justifiable for the 1984 fiscal year in my opinion.

5. In Note 7, Harnischfeger describes the effect of LIFO inventory liquidation on its reported profits in 1984. Describe what is meant by LIFO liquidation and how liquidation affects a company’s income statement and balance sheet.

LIFO liquidation would occur if current sales are higher than current purchases, as a result, any inventory not sold in previous periods must be liquidated.

The effect of the LIFO liquidation on the Harnischfeger’s income statement is an increase in net income by $2.4 million or $.20 in the 1984 fiscal year. There is no income tax effect. The balance sheet would have decrease of inventory, due to liquidation.

6. Note 8 states Harnischfeger’s allowance for doubtful accounts. Compute the ratio of the allowance to gross receivables

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