The purpose of the "Harnischfeger Corporation" case is to expose students to the managerial motives for making major financial reporting policy changes.
Generally accepted accounting principles (GAAP) allow companies wide latitude in the choice of accounting policies. After a firm chooses a set of accounting policies, current accounting rules permit changes from one alternative policy to another at the discretion of the management. Since reported accounting figures are widely used by a number of external parties, managers of firms have incentives to choose accounting policies in order to influence the behavior of these ...view middle of the document...
Copyright ( 1987 by the President and Fellows of Harvard College. Harvard Business School teaching note 5-187-152.
This case can be used in several different ways. At the Harvard Business School, the case has been used as part of a module dealing with the accounting policy decisions of firms and the stock market's ability to "see through" these decisions. The sample assignment described below assumes that the case is used by itself in a second-year MBA course on financial statement analysis or a course on financial reporting.
QUESTIONS FOR STUDENTS
The following set of questions are in the textbook and are designed for use in a class where the instructor prefers to provide a minimum level of structure to the students:
1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these changes on the company's 1984 reported profits.
2. What do you think are the motives of Harnischfeger's management in making the changes in its financial reporting policies? Do you think investors will see through these changes?
3. Assess the company's future prospects given your insights from questions (1) and (2) and the information in the case on the company's turnaround strategy.
For instructors who prefer to use a more structured approach to teaching the case, the following questions will guide students through the material:
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements (pages 212-213 of the text).
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?
3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
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 (pages 215-216), 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.
6. Note 8, page 216, 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 its R&D expense in 1984 relative to the previous two years. Do you think this change was motivated by business considerations or accounting considerations? ...