It was established by Harvard in , a German Pharmacist who initially introduced "FarineLactee"; a mix of flour and milk to feed babies and reduce mortality rate. The 2 ended up being competitors initially however later merged in , leading to the birth of Harnischfeger Corp. Business is now a multinational company. Unlike other multinational business, it has senior executives from different countries and tries to make choices considering the whole world. Harnischfeger Corp currently has more than factories around the world and a network spread throughout 86 nations.
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This was caused mainly by the cost reduction strategies that most of their major consumers were assuming at the time. Harnischfeger Corporation HC , one of the oldest manufactures in the machinery industry was among the several companies that had to restructure their strategy in order to survive the economic downturn. Although these changes had a great impact on HC profits, it is clear in the case that the changes in accounting policies had an even greater effect on HC profitability during the fiscal year of Step 1: Identify Principal Accounting Policies First, it is important to point out some key accounting policies noted in the financial statements of Harnischfeger Corporation for later analysis.
Step 2: Assess Accounting Flexibility The next section of this analysis is to assess the accounting flexibility within the business model of Harnischfeger Corporation and assess the extent to which management utilizes this flexibility. As previously discussed, the company changed its depreciation method in from an accelerated method to the straight line method. Financial statements of certain consolidated subsidiaries, principally foreign, had fiscal years ending September 30 while previously these subsidiaries had fiscal years ending July.
By changing the fiscal year of foreign subsidiaries ending period of September 30 instead of July 31 , the reporting period for the subsidiaries increased from 12 months to 14 months.
The Corporation added products purchased from Kobe Steel, which were re-sold by the Corporation, into its net sales in Also, profit margin dropped from 1. The potential rationale behind this change will be discussed later in this analysis. The reduction in funding, and consequent increase in cash, is treated as income amortized over 10 years. Step 4: Evaluate the Quality of Disclosure Harnischfeger disclosures were in accordance with GAAP and, in addition, the company included all the changes in accounting in the financial notes.
It is clear in the case that most of the profits in were due to the change in the depreciation method, but they also had other means and positive changes that contributed to their financial position at the end of the year.
Step 5: Identify Potential Red Flags A major red flag in the Harnischfeger financial statements is the exception to the unqualified opinion from the auditors. The auditors, though, seem to agree with the change as the most accurate method of reporting for the company.
It appears as though many of the accounting changes made in are to increase net income, but the impact appears to be short term benefits for most of the changes. An operational issue that is important to note is that accounts receivable were significantly reduced and accounts payable significantly increased in This could mean that accounts receivable are being collected more quickly, but the impact on accounts payable indicates that Harnischfeger is paying its suppliers more slowly.
This can indicate an inability to pay suppliers for some reason, which is unusual since, if the company is collecting accounts receivable more quickly, the company should subsequently be able to pay suppliers more quickly.
Inventory reductions in , and resulted in liquidation of LIFO inventory quantities carried at lower costs compared with the current cost of their acquisitions.
This resulted in increased net income for by 2. The balance sheet also reflected an improvement in liquidity. The large decrease in research and development spending is another operational red flag for Harnischfeger.
The convoluted corporate structure of Harnischfeger including foreign and unconsolidated subsidiaries makes it easy to hide financial issues off the financial statements of the main corporation. However, due to their operating, financial leverage and market based strategies, Harnischfeger has considerably reduced their loss as compared to previous years. In order to undo the accounting distortions we concentrated our attention on the following accounting issues: change in depreciation method in , LIFO layer liquidation as indicated in the financials, research and development partnership adjustments and taxes.
The net income for is definitely misleading, but even after you account for the effects of the various accounting changes and estimates, they still seemed to perform better than the prior year. They were able to restructure their debt and give themselves some breathing room for the time being to focus on growth and how to improve operations. The move away from large construction equipment towards material handling and systems activities will improve margins and take advantage of growth opportunities.
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