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Note 2 of its financial statements ? Harnischfeger Corporation computed depreciation expenses on plants, machinery and equipment using the straight-line method for financial reporting purposes. 2. What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years? ? ? The effect of this change was applied retroactively to all assets that were subjected to accelerated depreciation. It increased net income by $11 million or $0. 93 per share. 3. What is the effect of the depreciation lives change? How will this change affect future reported profits? ? The effect of depreciation lives on Harnischfeger’s US plants, machinery and equipment and residual values on certain machinery and equipment had increased net income by .

2 million or $0. 27 per share. 4. The depreciation accounting changes assume that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly. Given the business conditions Harnischfeger was facing in its primary industries in 1984, are these economic assumptions justified? ? ? 5. In Note 7, Harnischfeger describes the effect of LIFO inventory liquidation on its reported profits in 1984.

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Describe what is meant by LIFO liquidation and how liquidation affects a company’s income statement and balance sheet. ? ? 6. Note 8, states Harnischfeger’s allowance for doubtful accounts. Compute the ratio of the allowance to gross receivables (receivables before the allowance) in 1983 and 1984. What would the allowance have been if the company maintained the ratio at the 1983 level? How much did the pre-tax income increase as a result of the changed ratio in 1984? ? ? 7. Note 9, page 216, states that Harnischfeger decreased R&D expense in 1984 relative to the previous two years.

Do you think this change was motivated by business considerations or accounting considerations? How did this change affect the company’s reported profits in 1984? ? ? 8. Note 11, describes a number of changes in Harnischfeger’s pension plans in 1984. Describe these changes as clearly as you can. What are the economic consequences of these changes to Harnischfeger and its workers? ? ? 9. How did the pension plan changes affect Harnischfeger’s financial statements in 1984? Are these changes likely to affect future profits? ? ? 10.

Summarize all the accounting changes Harnischfeger made in 1984, and their effects on pre-tax profits and cash flows in 1984. ? ? 11. Accounting statements are used by investors, lenders, customers, employees, and governments in dealing with Harnischfeger. Among these groups, who is most likely to “see through” the above accounting changes, and who is least likely to do so? ? ? 12. Are the accounting changes likely to help or to hinder Harnischfeger’s ability to implement its business plan? Be as specific as possible. ? ? 13. Overall, what is your assessment of Harnischfeger’s future as of 1984

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