Financial Reporting and Analysis Week 2 Harnischfeger Case - Assignment Example

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This had to do with the introduction of straight-line method, which made it possible to compute and include depreciation expense on plants, machinery and equipment in its financial report. This brought about…
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Financial Reporting and Analysis Week 2 Assignment Harnischfeger Case
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There is one major accounting change that Harnischfeger made in 1984. This had to do with the introduction of straight-line method, which made it possible to compute and include depreciation expense on plants, machinery and equipment in its financial report. This brought about an accelerated depreciation, leading to an increased net income of $11.0 million. The increases can be attributed to the changes made, which now guaranteed that the company would have a more equitable allocation of the cost of all items included in the newly created accounting column.
With the coming in of the straight-line method for financial reporting which is a change that has built on the previously used method which was the principally accelerated method, some level of changes have been recorded on the income of the company. Even though it is described to be insignificant, there has been an upsurge in the reported income of the company by $11.0 million. Into the future, this change will only affect profits positively when the company is able to maintain its current expenditure or is able to keep that also lower than it currently stand (Cao, 2009).
The accounting changes that were recorded also affected changes in the depreciation lives, which focused on specific areas of the company’s operations. These included U.S plants, machinery and equipment and residual values on selected items. The effect of this was an increase in net income by $3.2 million for 1984 alone. In the most immediate future, reported profits are expected to go up as a result of this. However, Conrad (2009) also noted that increased income can only be likened to guaranteed profits if expenditure is also low.
The current economic assumptions that Harnischfeger’s plant and machinery will last longer and only lose their value slowly can be noted to be justified. This is because of a number of reasons. In the first place, most of the challenges that the business was facing as part of its business conditions in the primary industries are no more. Secondly, the depreciation accounting will now ensure that there is less pressure on plant and machinery, giving room for the lifespan of these to last longer.
LIFO liquidation is simply a method of inventory costing that states for last in, first out. LIFO liquidation is noted to take place in situations where current sales are noted to be higher than current purchases, leading to the need to liquidate all inventory that were not sold in the previous periods (Hull and White, 2010). The effect of LIFO liquidation on income statement and balance sheet is a possible increase in net income that comes on the back of decline on net loss.
To compute the ratio, net accounts receivables would first be computed for at Gross A/R – The allowance for doubtful accounts
For 1983,
Net A/R = $109,919,000 – $6,400,000 = $103,519,000
This means Ratio = $6,400,000/$103,519,000 = 0.0618
The ratio is 6.18%
For 1984,
Net A/R = $147,372,000 – $5,900,000 = $141,472,000
This means Ratio = $5,900,000/$141,472,000 = 0.0417
The ratio is 4.17%
From the ratios above, it would be noted that the allowance to gross receivables of the company would have been higher if the ratio for 1983 was maintained. But with the ratio coming down in 1984, the pre-tax income came to stand at $5.7 million
R&D expense is always justified to be highly necessary and needful for achieving business growth (Subrahmayam and Choi, 2004). There are however times that companies find this expense as overly demanding on accounting outcomes. In line with, reduction in R&D expense is always done as a result of accounting considerations. As a nominal expense value, the reduction can be said to have been responsible for increase in profits in 1984 but there will be long term negative effects.
One of the changes in the pension plans in 1984 included an increase in the minimum pension benefit that was given. There was also a lot of investment with the accumulated pension fund which included the Pension Trusts purchasing certain securities that came with yields of 13% and 12%. There was also much attention given to the life insurance benefit and health insurance benefit of members, which increased the expenditure for pension on those scores for 1984.
Some of the pension plans led to increase in expenditure whiles others brought in more income. Those that brought in the incomes were the investment oriented changes. As profit is the difference between expenditure and income, it was expected that the effect on pension would be determined by the margins of difference. On the whole, there was cost saving in pension due to increased income over expenditure. This had a positive effect on financial statement in 1984. Should this continue, future profits will be affected positively.
The accounting changes at Harnischfeger in 1984 can be summarized as one that was profit oriented. Such profitability was however focused directly in creating more wealth by increasing the revenue of the company. This ensured that there was more inflow of cash as the income of the company went up. In terms of pre-tax profits, most of the changes were directed at aspects of accounts that did not require tax deductions. This ensured that pre-tax profits were also maximized.
Once there are increases in the income levels of a company, it is certainly expected that share prices will also be affected positively. The changes can therefore be said to have been responsible for increased share prices. As this happens, investors are the ones to see through the changes more easily because they are the ones who focus on share prices for profitability (Conrad, 2009). Customers on the other hand are less likely to see through this as customers are largely focused on the outcome in terms of quality service delivery and not financial outcomes.
The accounting changes are more likely to help the company implement its business plan. This is because the company now looks more credit worthy and investor friendly. This means that the chances that there will be more cash flowing into the company by way of both investor engagement and loan facilities are higher. Meanwhile when such funding is secured, the possibility to implementing business plan becomes increased.
The future of Harnischfeger is currently very promising but the company needs to focus on cost reduction also as it is now focusing on income generation. This is because it is only when there is this form of balance that the company can be guaranteed of profitability (Subrahmayam and Choi, 2004).
Cao, H.H., (2009). “The effect of derivative assets on information acquisition and price behavior in a rational expectations equilibrium”, Review of Financial Studies 12, 131-163.
Conrad J. (2009) "The price effect of option introduction" The Journal of Finance, 44, 2, 487-498.
Hull, J. and White, A., (2010). “Valuing credit default swaps I: No counterparty default risk”, Journal of Derivatives 8, p. 29-40.
Subrahmayam A. and Choi H. (2004) “Using intraday data to test for effects of index futures on the underlying stock markets” The Journal of Futures Markets, 14, 3, 293- 322. Read More
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