Answer:
Harnischfeger Corporation
Measuring Sustainable Earnings
a. Sustainable earnings = $1,530,000
b. Most analysts at the capital market would like to recalculate the net income to the actual income without the change in Harnischfeger depreciation accounting policy in order to understand the effect of the change.
Explanation:
a) Data and Calculations:
Excerpts from Harnischfeger financial statements
(in thousands)
Income before income taxes, equity items,
and cumulative effect of accounting method change 5,838
Provision for income taxes (2,452)
Income after taxes 3,386
Equity items 858
Cumulative effect of change in depreciation method 11,005
Net income 15,249
Sustainable Earning:
(in thousands)
Income before income taxes, equity items,
and cumulative effect of accounting method change 5,838
Change in estimate (3,200)
Adjusted income 2,638
Income taxes (42%) (1,108)
Income after taxes 1,530
Income taxes rate = 2,452/5838 * 100 = 42%
b) Sustainable earnings differ from actual net earnings or income by removing the amount of irregular revenues, expenses, gains, and losses included in the financial year's net income. Sustainable earnings enable the users of financial statements to estimate a company's future earnings without the “noise” generated by irregular accounting items around the net income figure.
