Digital Fortress Chapter 47

â€Å"A billion-dollar code?† Midge snickered, accompanying Brinkerhoff back up the hallway. â€Å"That's a good one.† â€Å"I swear it,† he said. She eyed him askance. â€Å"This better not be some ploy to get me out of this dress.† â€Å"Midge, I would never-† he said self-righteously. â€Å"I know, Chad. Don't remind me.† Thirty seconds later, Midge was sitting in Brinkerhoff's chair and studying the Crypto report. â€Å"See?† he said, leaning over her and pointing to the figure in question. â€Å"This MCD? A billion dollars!† Midge chuckled. â€Å"It does appear to be a touch on the high side, doesn't it?† â€Å"Yeah.† He groaned. â€Å"Just a touch.† â€Å"Looks like a divide-by-zero.† â€Å"A who?† â€Å"A divide-by-zero,† she said, scanning the rest of the data. â€Å"The MCD's calculated as a fraction-total expense divided by number of decryptions.† â€Å"Of course.† Brinkerhoff nodded blankly and tried not to peer down the front of her dress. â€Å"When the denominator's zero,† Midge explained, â€Å"the quotient goes to infinity. Computers hate infinity, so they type all nines.† She pointed to a different column. â€Å"See this?† â€Å"Yeah.† Brinkerhoff refocused on the paper. â€Å"It's today's raw production data. Take a look at the number of decryptions.† Brinkerhoff dutifully followed her finger down the column. NUMBER OF DECRYPTIONS = 0 Midge tapped on the figure. â€Å"It's just as I suspected. Divide-by-zero.† Brinkerhoff arched his eyebrows. â€Å"So everything's okay?† She shrugged. â€Å"Just means we haven't broken any codes today. TRANSLTR must be taking a break.† â€Å"A break?† Brinkerhoff looked doubtful. He'd been with the director long enough to know that â€Å"breaks† were not part of his preferred modus operandi-particularly with respect to TRANSLTR. Fontaine had paid $2 billion for the code-breaking behemoth, and he wanted his money's worth. Every second TRANSLTR sat idle was money down the toilet. â€Å"Ah†¦ Midge?† Brinkerhoff said. â€Å"TRANSLTR doesn't take any breaks. It runs day and night. You know that.† She shrugged. â€Å"Maybe Strathmore didn't feel like hanging out last night to prepare the weekend run. He probably knew Fontaine was away and ducked out early to go fishing.† â€Å"Come on, Midge.† Brinkerhoff gave her disgusted look. â€Å"Give the guy a break.† It was no secret Midge Milken didn't like Trevor Strathmore. Strathmore had attempted a cunning maneuver rewriting Skipjack, but he'd been caught. Despite Strathmore's bold intentions, the NSA had paid dearly. The EFF had gained strength, Fontaine had lost credibility with Congress, and worst of all, the agency had lost a lot of its anonymity. There were suddenly housewives in Minnesota complaining to America Online and Prodigy that the NSA might be reading their E-mail-like the NSA gave a damn about a secret recipe for candied yams. Strathmore's blunder had cost the NSA, and Midge felt responsible-not that she could have anticipated the commander's stunt, but the bottom line was that an unauthorized action had taken place behind Director Fontaine's back, a back Midge was paid to cover. Fontaine's hands-off attitude made him susceptible; and it made Midge nervous. But the director had learned long ago to stand back and let smart people do their jobs; that's exactly how he handled Trevor Strathmore. â€Å"Midge, you know damn well Strathmore's not slacking,† Brinkerhoff argued. â€Å"He runs TRANSLTR like a fiend.† Midge nodded. Deep down, she knew that accusing Strathmore of shirking was absurd. The commander was as dedicated as they came-dedicated to a fault. He bore the evils of the world as his own personal cross. The NSA's Skipjack plan had been Strathmore's brainchild-a bold attempt to change the world. Unfortunately, like so many divine quests, this crusade ended in crucifixion. â€Å"Okay,† she admitted, â€Å"so I'm being a little harsh.† â€Å"A little?† Brinkerhoff eyes narrowed. â€Å"Strathmore's got a backlog of files a mile long. He's not about to let TRANSLTR sit idle for a whole weekend.† â€Å"Okay, okay.† Midge sighed. â€Å"My mistake.† She furrowed her brow and puzzled why TRANSLTR hadn't broken any codes all day. â€Å"Let me double-check something,† she said, and began flipping through the report. She located what she was looking for and scanned the figures. After a moment she nodded. â€Å"You're right, Chad. TRANSLTR's been running full force. Raw consumables are even a little on the high side; we're at over half a million kilowatt-hours since midnight last night.† â€Å"So where does that leave us?† Midge was puzzled. â€Å"I'm not sure. It's odd.† â€Å"You want to rerun the data?† She gave him a disapproving stare. There were two things one never questioned about Midge Milken. One of them was her data. Brinkerhoff waited while Midge studied the figures. â€Å"Huh.† She finally grunted. â€Å"Yesterday's stats look fine: 237 codes broken. MCD, $874. Average time per code, a little over six minutes. Raw consumables, average. Last code entering TRANSLTR-† She stopped. â€Å"What is it?† â€Å"That's funny,† she said. â€Å"Last file on yesterday's queue log ran at 11:37 p.m.† â€Å"So?† â€Å"So, TRANSLTR breaks codes every six minutes or so. The last file of the day usually runs closer to midnight. It sure doesn't look like-† Midge suddenly stopped short and gasped. Brinkerhoff jumped. â€Å"What!† Midge was staring at the readout in disbelief. â€Å"This file? The one that entered TRANSLTR last night?† â€Å"Yeah?† â€Å"It hasn't broken yet. It's queue time was 23:37:08-but it lists no decrypt time.† Midge fumbled with the sheets. â€Å"Yesterday or today!† Brinkerhoff shrugged. â€Å"Maybe those guys are running a tough diagnostic.† Midge shook her head. â€Å"Eighteen hours tough?† She paused. â€Å"Not likely. Besides, the queue data says it's an outside file. We should call Strathmore.† â€Å"At home?† Brinkerhoff swallowed. â€Å"On a Saturday night?† â€Å"No,† Midge said. â€Å"If I know Strathmore, he's on top of this. I'll bet good money he's here. Just a hunch.† Midge's hunches were the other thing one never questioned. â€Å"Come on,† she said, standing up. â€Å"Let's see if I'm right.† Brinkerhoff followed Midge to her office, where she sat down and began to work Big Brother's keypads like a virtuoso pipe organist. Brinkerhoff gazed up at the array of closed-caption video monitors on her wall, their screens all freeze frames of the NSA seal. â€Å"You're gonna snoop Crypto?† he asked nervously. â€Å"Nope,† Midge replied. â€Å"Wish I could, but Crypto's a sealed deal. It's got no video. No sound. No nothing. Strathmore's orders. All I've got is approach stats and basic TRANSLTR stuff. We're lucky we've even got that. Strathmore wanted total isolation, but Fontaine insisted on the basics.† Brinkerhoff looked puzzled. â€Å"Crypto hasn't got video?† â€Å"Why?† she asked, without turning from her monitor. â€Å"You and Carmen looking for a little more privacy?† Brinkerhoff grumbled something inaudible. Midge typed some more keys. â€Å"I'm pulling Strathmore's elevator log.† She studied her monitor a moment and then rapped her knuckle on the desk. â€Å"He's here,† she said matter-of-factly. â€Å"He's in Crypto right now. Look at this. Talk about long hours-he went in yesterday morning bright and early, and his elevator hasn't budged since. I'm showing no magno-card use for him on the main door. So he's definitely in there.† Brinkerhoff breathed a slight sigh of relief. â€Å"So, if Strathmore's in there, everything's okay, right?† Midge thought a moment. â€Å"Maybe,† she finally decided. â€Å"Maybe?† â€Å"We should call him and double-check.† Brinkerhoff groaned. â€Å"Midge, he's the deputy director. I'm sure he has everything under control. Let's not second-guess-â€Å" â€Å"Oh, come on, Chad-don't be such a child. We're just doing our job. We've got a snag in the stats, and we're following up. Besides,† she added, â€Å"I'd like to remind Strathmore that Big Brother's watching. Make him think twice before planning any more of his hare-brained stunts to save the world.† Midge picked up the phone and began dialing. Brinkerhoff looked uneasy. â€Å"You really think you should bother him?† â€Å"I'm not bothering him,† Midge said, tossing him the receiver. â€Å"You are.†

Harnischfeger Corporation

Financial Reporting & Analysis April 19th, 2013 Case Study- Harnischfeger Corporation 1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. The accelerated depreciation method was changed from to straight-line on all company assets that caused to increase after-tax net income for 1984 by $11. 005 million. The cumulative effect of change in 1984 there will be no reduction in the depreciation expense due to change. in 1984 decreased by $7. 0 million over the previous year.Most of this reduction was a result of the company's agreement with Kobe Steel, Ltd. Under this agreement, Kobe agreed to reimburse Harnischfeger up to $17. 0 million dollars of R;D expense over a period of three years. However, some students argue that Harnischfeger may be cutting its research budget since the actual reduction in Harnischfeger's    1984 R&D expense is more than one-third of this amount. (See Exhibit 4, Notes 6 and 9, in the case. ) 8 . Effective 1984, Harnischfeger began to include in its net sales products purchased from Kobe Steel, Ltd. , and sold to third parties by Harnischfeger.Previously only the gross margin on Kobe-originated equipment was included in Harnischfeger's financial statements. This increased Harnischfeger's sales in 1984 by $28. 0 million but had no impact on its profits. Some students would mistakenly argue that this had an impact on Harnischfeger's net income. (See Exhibit 4, Note 2, in the case. ) Although some of the above are pure accounting decisions with no direct cash-flow consequences, the other decisions affect the company's reported profits as well as its cash flow. The instructor should ask the class to identify the latter-type decisions among the above.Discussion of Question 2 The above analysis shows that most, if not all, of the reported profits of Harnischfeger in 1984 are produced by accounting changes. Therefore, the accounting changes helped the management report a signific ant profit rather than a modest loss. The instructor should point this out to the class and ask: Why do you think the management of Harnischfeger made these accounting changes? Students point out a number of possible motives for the accounting changes: 1. Boost the company's stock price so that the company could raise new capital, 2.Meet the earnings targets of the company's top management compensation plan, 3. Avoid the violation of debt covenant restrictions, and 4. Improve the company's image with the customers, dealers, and prospective employees. Some students argue that the analysis in Question (1) shows that it is too complicated for an average investor to â€Å"see through† the impact of all the accounting changes. They further point out that, even if many analysts recognize the effect of the company's accounting decisions on the 1984 profits, it is quite unlikely that the analysts would be able to assess the impact of these changes in future years.Other students are l ikely to argue that the market processes the reported profit numbers efficiently. They argue that there are some sophisticated analysts who could perform the analysis that was done in the class. The instructor should encourage this discussion. At some point in the discussion, the instructor should intervene and summarize the evidence from the research literature: 1. There is considerable evidence in finance and accounting literature that shows that the capital markets are generally efficient. 2.For stock prices to reflect reality in an unbiased manner, it is not necessary that everyone in the market has to process the information correctly. As long as there are some sophisticated investors who can â€Å"see through† the company's accounting changes, the stock price will reflect this due to the possibility of arbitrage by these investors. 3. The accounting studies that examine the stock market reaction to accounting changes conclude that the market is not fooled by the account ing decisions of firms. However, the evidence presented in these studies is not conclusive.Also, these studies do not examine whether the stock market recognizes the recurring effects of accounting changes. Without additional research, it is difficult to make conclusive statements on this issue. 4. Even if capital markets see through the effects of accounting changes, managers may believe otherwise in making accounting decisions. This is likely to happen if there are no significant penalties associated with such behavior. Even if investors fully recognize the impact of Harnischfeger's accounting decisions, there are other reasons for the company's managers to make these decisions.As Exhibit 2 in the case indicates, the top management of the company is awarded significant bonuses based on the company's reported profits. This provides an incentive for the managers to boost profits through accounting changes. However, if the compensation committee of the company's board of directors re cognizes this possibility, the committee could adjust the reported profits before awarding management bonuses. The instructor should challenge the students by asking: If investors can see through these changes from public information, why can't the board do it, especially when it has access to additional information in the firm?The third possible motive that is mentioned by the students is the desire of Harnischfeger's management to avoid the violation of debt covenant restrictions. Since the company recently experienced the painful consequences of violating these restrictions, it is plausible that the management changed the accounting policies to avoid future violations of the debt restrictions. If debt covenants are specified in terms of accounting numbers, managers have an incentive to choose accounting policies to minimize the violation of the covenants.However, if lenders recognize this possibility, lending agreements would be modified to avoid this possibility as long as the c ost of such a modification is not significant. The fourth possibility is that the accounting decisions are motivated by a desire to convince the company's customers, suppliers, dealers, and employees that Harnischfeger is again back on track and is viable. Given the nature of the company's products, a lack of confidence in the company's viability is likely to impair the company's ability to sell its products.In fact, the company was negotiating long-term contracts in 1984 with the governments of Turkey and China. It is quite possible that the company's return to profitability might have helped the management in this respect. Similarly, the company's ability to attract and retain talented employees might have been helped by the image that the company was back on track. During my visit to the company, Harnischfeger's management pointed out one additional factor in the company's accounting decisions: the role of internal management considerations.The company used the same set of accoun ting rules for external reporting and for internal management accounting. The company's product pricing was based on fully allocated product costs, and therefore its accelerated depreciation policies apparently caused its products to be overpriced relative to competition. In addition, the higher depreciation charges led to increased capital reinvestment demands from its divisions for maintaining and replacing the company's fixed assets.The company's management mentioned three principal reasons for its accounting decisions: (1) a belief that the external users of accounting data did not adjust for Harnischfeger's conservative financial reporting when comparing the company's performance with other companies in the industry, (2) the unpleasant experience with its debt covenant restrictions, and (3) the interaction between management accounting and external reporting. These reasons are discussed in greater detail in my paper, â€Å"The Anatomy of an Accounting Change. â€Å"Underlying all the accounting changes was a reporting philosophy outlined by the then chief financial officer and the current president of the company: In accounting there is no such thing as absolute truth. The same underlying reality can be accounted for using a range of assumptions. The earlier philosophy of this company was to choose the conservative alternative whenever there was a choice. Now we have decided to change this. We would like to tell the world that we are alive and well. We wish to tell the truth but do not want to be overly conservative in doing so.When the outside world compares our financial performance with that of other companies, they may or may not take the time and effort to untangle the effects of the differences in financial policies that various companies follow. My own belief is that people adjust for the obvious things like one-time gains and losses but have difficulty in adjusting for ongoing differences. In any case, these adjustments impose a cost on the user . If people adjust for the differences in accounting policies when they compare us with other companies, then it should not matter whether we follow conservative or liberal policies.But suppose they do not adjust. Then clearly we are better off following the more liberal policies than conservative policies. I am not sure whether people make the adjustments or not, but either way we wish to present an optimistic version of the picture and let people figure out what to do with the numbers. As a company you have to put the best foot forward if you want to raise capital, convince customers that you are a viable company, and attract talented people to work for the company. I feel that the financial reporting should help rather than hinder the implementation of our operating trategy. In my opinion, the changed accounting format highlights the effectiveness of our strategy better than the old policies do. The instructor can sum up the class discussion on question (2) by mentioning the view s of the management described above. Discussion of Question 3 After completing the analysis of Harnischfeger's accounting policy changes, the class should be asked to assess the company's future. At this point, I go back to my original question to the class, namely, â€Å"Is it worthwhile to invest in the company's stock in early 1985?    I call on a student who considers the company's stock a good investment and ask him or her to explain why. Harnischfeger's turnaround strategy consists of four elements: (1) changes in top management, (2) cost reductions to lower the company's break-even point, (3) reorientation of the company's business, and (4) restructuring the company's finances to facilitate the implementation of the reorientation strategy. The changes in the top management seem to be good. The new chief executive officer (CEO) has considerable experience in Harnischfeger's industry.The new CEO demonstrated his credibility with the financial community by successfully negoti ating with the company's lenders to restructure the company's debt. The new management has taken several steps in the right direction. The company's cost-reduction programs seem to be paying off. These programs were helpful in reducing the company's losses in 1984. The financial management of the company also seems to be sound. The cost-reduction programs and the pension restructuring have improved the company's cash flow.The total cash-flow analysis, shown in Exhibit 1, indicates that the company has been able to generate positive cash flow from its operations in 1984. The company raised substantial new capital through a public offering of debentures and common stock and used the proceeds to pay off all of the company's restructured debt. Finally, the company's business strategy seems to be sound. The management recognized the potential to exploit the company's strength in the material handling equipment business.Through its Harnischfeger Engineers subsidiary, the company planned t o expand in this area and concentrate on the high margin â€Å"systems† business. This strategy is likely to help the company to move away from the mining and construction equipment business, which is a low-growth and cyclical industry, to a higher-growth and more stable business. Students who are optimistic about the company's future cite the above factors as the reasons for their support for the company and its management.They argue that these factors indicate that the company's new management has the right ideas and knows how to turn the company around. These students suggest that the management's accounting decisions were part of its attempt to implement the company's strategy and are therefore constructive. The instructor should wrap up the case discussion by reviewing the company's motives for its accounting decisions. The instructor should point out that understanding these motives is essential for an analyst who is interested in assessing the company's current perform ance and its future potential.The instructor may end the class by taking a second vote on the investment potential of the company's stock and sharing with the class the subsequent events described below. SUBSEQUENT DEVELOPMENTS The following events describe the developments subsequent to the time of the case. As can be seen, Harnischfeger seems to have succeeded in implementing its strategy effectively. Also, the company continued to liberalize its financial reporting policies. 1985 1. The company changed its accounting for duration patterns and tooling. Previously, the cost of the patterns and tooling was expensed in the year of acquisition.Under the new method, these costs are capitalized and amortized over their estimated useful lives. 2. Harnischfeger reported a net profit of $0. 74 per share for fiscal 1985. The accounting change described above contributed $0. 24 per share to the reported profits. 3. The company raised $147 million by issuing preferred stock. 1986 1. Mr. Goess el was appointed as the chairman and CEO of the company, and Mr. Grade was appointed as the president and chief operating officer (COO). Previously, Mr. Goessel was the president and COO, and Mr. Grade was the CFO. 2.Harnischfeger acquired Beloit Corporation, a producer of papermaking machinery and systems, for $175 million in cash. Later in the year, stock equivalent to a 20% equity interest in Beloit was sold to Mitsubishi Heavy Industries, Ltd. , for $60 million in cash. 3. The company acquired Syscon Corporation, a firm based in Washington, DC for $92 million in cash. Syscon developed advanced computer systems for military markets. 4. Harnischfeger announced a plan to sell the company's Construction Equipment Division for approximately $17 million in cash and $55 million in debentures. . The company reported that Harnischfeger Engineers received a major order for the design of an automated car assembly plant. 6. Harnischfeger reported a net loss of $1. 14 per share for fiscal 19 86. This consisted of a profit of $2. 15 per share from continuing operations, a loss of $4. 45 per share from discontinued operations (Construction Equipment Division), and a gain of $1. 16 per share from the adoption of the new pension accounting rules. 1987 1. Harnischfeger received a takeover offer from Columbia Ventures, Inc. , for $19 per share in cash.The company considered the offer inadequate and rejected it. Exhibit 1 Total Cash-Flow Analysis ($ in thousands) |                                                                                                          |1984                         |1982                         |1981                         | |                                                                                                          |                               |                               |                               | |Working capital from operations                                                          | $ 2,961                   | $ 1,763                   | $ (55,902)             | |(Increase)/decrease n accounts receivable                                           |(23,908)                   |(5,327)                   |42,293                      | |(Increase)/decrease in inventories                                                       |9,282                      |56,904                      |26,124                      | |(Increase)/decrease in refundable income taxes and related interest    |                               |                               |                               | |                                                                                                          |11,289                      |(2,584)                   |(6,268)                   | |(Increase)/decrease in other current assets                                        |259                         |10,008                      |(439)                      | |Increase/(decrease) in accounts payable                                              |16,488                      |(1,757)                   |(3,302)                   | |Increase (decrease) in employee compensation and benefits payable       |                               |                               | |                                                                                                          |698                         |(15,564)                   |(3,702)                   | |Increase/(decrease) in accrued plant closing costs                               |(3,888)                   |(14,148)                   |20,496                      | |Increase (decrease) in other current liabilities                                  |    (3,181)                |    (15,927)                |    (3,030)                | |Cash from operating cycle                                                                   | $ 10,000                | $ 13,368                | $ 16,270                | |Minus plant and equipment additions                                                    |    (5,546)                |    (1,871)                |    (10,819)                | |Cash before dividends, investments, and    external financing                |                               |                               |                               | |                                                                                                          |$ 4,454                   |$ 11,497                   |$ 5,451                   | |Minus cash dividends                                                                   à ‚         |    0                         |    0                         |    (2,369)                | |Cash before investments and external financing                                     | $ 4,454                   | $ 11,497                | $ 3,082                   | |Minus advances to unconsolidated companies                                           |(2,882)                   |0                            |0                            | |Plus other                                                                                           |    269                      |    1,531                   |    848                      | |Cash before external financing                                                             | $ 1,841                   | $ 13,128                | $ 3,930                   | |                                                                                                          |                               |                               |                               | |External Financing:                                                                            |                               |                               |                               | |                                                                                                          |                               |                               |                               | |Proceeds from senior notes and subordinated                                        |                               |                               |                               | |Debentures                                                                                           |$ 120,530                |$ 0                         |$ 0                         | |Conversion of export and factored receivable sales to debt                   |                               |                               |                               | | 0                            |23,919                      |0                            | |Restructured debt                                                                               |0                            |158,058                   |0                            | |Debt replaced, including conversion of    receivable sales of 23,919       |                               |                               |                               | |                                                                                                          |0                            |(158,058)                |0                            | |Repayments of debt                                                                               |(161,500)                |(760)                      |(9,409)                   | |Increase (repayment) of short-term bank notes payable                         |2,107                      |(3,982)                   |(2,016)                   | |Other increases in debt                                                                      |1,474                      |0                            |25,698                      | |Issuance of common stock                                                                      |21,310                      |0                            |449                         | |Issua nce of common stock warrants                                                       |6,663                      |0                            |0                            | |Salaried pension assets reversion                                                       |    39,307                   |    0                         |    0                         | |Cash from external financing                                                                | $ 29,891                | $ 19,177                | $ 14,722                | |Net increase (decrease) in cash    and temporary investments                   |                               |                               |                               | |                                                                                                          |$ 31,732                   |$ 32,205                   |$ 18,652                   | 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? It increased the net income to $11 million for 1984 or $. 93 per common and common equivalent share. The straight-line method will allow the assets to continue to depreciate in the same amount for the life of the asset.This change will increase profit in future years even thought the depreciation expense in strait-line will be higher that would’ve been with accelerated method. 3. What is the effect of the depreciation lives change? How will this change affect future reported profits? As a result of going t o strait-line the company also has changed its estimated depreciation lives on certain U. S. plants, machinery and equipment and residual values on certain machinery and equipment, which increased net income for 1984 by $3. 2 million or $. 27 per share. No income tax effect was applied to this change. This change should report higher profits in the coming years. $3. 2 million or $. 27 per share. No income tax effect was applied to this change. This change should report higher profits in the coming years. 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? Not necessarily, they can not fully predict the outcome of these changes but history shows them that as long as their plant machinery are more up to date production will perform at a better rate which shoul d lead to valuable resources needed to conduct good business. 5. In Note 7, 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. By LIFO liquidation means when a company’s accounting sells its oldest inventory since the current sales are higher then current purchases then the liquidation will occur, meaning that older inventory will be sold. The effect of the LIFO liquidation on the company’s income statement is an increase in net income by $2. 4 million or $. 20 in fiscal year 1984. There is no income tax effect. On the balance sheet there is a decrease of inventory, due to liquidation. 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? They cannot fully predict the outcome of these changes but history shows; however, we know they were experiencing a drop in sales this would also mean that they were giving less use to their machinery, and that would cause less wear and tear to the machinery justifying and increase on the useful life of the asset. 5. In Note 7, 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.The liquidation means selling of older inventory since the current sales are higher then current purchases then the liquidation will occur and as result any inventory not sold in previous periods must be liquidated. The company will benefit by an increase in net income by $2. 4 million or $. 20 in fiscal year 1984. Meaning that the net loss of previous year 1983 was reduced by a pproximately 15. 6 million. The balance sheet would have decrease of inventory from 12. 6 mil in 1983 to 5. 5 mil in 1984. 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? The company's provision for doubtful accounts receivables as a percentage of total receivables was 8. 4% in 1984. The corresponding percentage in 1983 was 11. 3%. If the company maintained the same percentage provision in the two years, the bad debt expense in 1984 would have been $1. 5 million more than the reported expense. 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 accountin g considerations?How did this change affect the company’s reported profits in 1984? Also R&D expense in 1984 decreased by $7. 0 million over the previous year. Most of this reduction was a result of the company's agreement with Kobe Steel, Ltd. Under this agreement, Kobe agreed to reimburse Harnischfeger up to $17. 0 million dollars of R;D expense over a period of three years plus the company was reduced in its size so there was no need to that big expenditures on R;D. 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?The reduction in benefits and wedges were significant from 1982 to 1984. In 1984 the pension expenses accounted for 1. 9 million, 1983 for 6. 5 million and 1982 for 12. 2 million The change in the return on investment assumption is for all US plans. The economic consequence is that there will be less expenditure made by these pension owners during the lifetime of their pension. The company established a new plan, which goal was an improvement in the minimum pension benefit. This constituted in a restructure of the Salaried Employees’ Retirement Plan. From one side that decision could help the company to rebuild the trust of customers and suppliers for continuing in business.From the other side, the workers would suffer a significant economic lost and could lose the motivation to work for the company. But there is a possibility that a positive view could emerge because they could appreciate the company’s efforts to keep them working there, and then cooperate to take the company to the next level. 9. How did the pension plan changes affect Harnischfeger’s financial statements in 1984? Are these changes likely to affect future profits? The effect of the changes in the investment return assumption rates for all U. S. plans, together with the 1984 restruc turing of the U. S. Salaried Employees' Plan, was to reduce pension expense by approximately $4. 0 million in 1984 and $2. million in 1983, and the actuarial present value of accumulated plan benefits by approximately $60. 0 million in 1984. This may have an effect on future profits. The pension plan changes affected positively the statements in 1984. Less assets were available for benefits; therefore, more income was reflected in the financial statements, which contributed to the cash to pay debt obligations. Furthermore, if reducing the debt, company could recover the banks and shareholder’s trust. 10. Summarize all the accounting changes Harnischfeger made in 1984, and their effects on pre-tax profits and cash flows in 1984. 1. Change in the recognition of some types of sales. This resulted in a change in sales calculation.Harnischfeger incorporated products purchased from Kobe Steel, which were re-sold by the company, into its net sales. This increased aggregate sales and cost of sales by $28 million. The effect of the change in sales calculation was an increase in both aggregate sales and cost of sales by $28 million. Also, profit margin dropped from 1. 55% to 1. 44%, which represented a 7. 1% change in profit margin. 2. Change in the fiscal year for some foreign subsidiaries. By changing the fiscal year of foreign subsidiaries (ending period of September 30 instead of July 31), the effect was the lengthening of the 1984 reporting period for the subsidiaries from 12 months to 14 months.This increased sales by $5. 4 million. 3. Change in the depreciation methods on assets. The depreciation policy for financial reporting purposes was changed to a straight-line method from a principally accelerated method. The effect of the change in depreciation method (straight-line method) was a net income of $11 million realized in 1984. Overall, depreciation charges resulted in an increase of $3. 2 million in net income in 1984. 4. Change in the use LIFO liquidat ion in inventory valuation. The effect of LIFO inventory liquidation was an increase in 1984 net income by $2. 4 million, as gains. 5. Change in the allowance for doubtful accounts.The company adjusted its allowance for doubtful accounts to 6. 7% of sales for 1984 from 10% of sales in 1983. The effect of the change in the allowance for doubtful accounts was that it resulted in $2. 9 million in operating income for 1984. 6. Change in the R&D expenses. Harnischfeger significantly reduced its R&D expenses to $5. 1 million in 1984, from 412. 1 million in 1983. The effect of the change in R&D expenses was an increase in operating profit by $9. 1 million. 7. Change in employee pension plans. The effect of the change in pension plans was a reduction in pension expenses by $14 million and increase in net income by $3. 9 million, and a positive cash flow. 11.Accounting statements are used by investors, lenders, customers, employees, and governments in dealing with Harnischfeger. Among these groups, who is most likely to â€Å"see through† the above accounting changes, and who is least likely to do so? The least likely to â€Å"see through† the accounting changes are just normal people who don’t know accounting concepts because some methods of reporting can overstate or understate the numbers without a sustainable change so investors, lenders, and governments should be the ones to most likely â€Å"see through† the change and based on what they see they make a decisions. Employees in accounting, finance, and upper management should be able to â€Å"see through† the changes. 12.Are the accounting changes likely to help or to hinder Harnischfeger’s ability to implement its business plan? Be as specific as possible. Even thought the changes indicate an optimistic move, it does not guarantee that the company is going to be able to implement its business plan. The changes made strongly justify company’s boost in the periods an alyzed. From my point of view, company reflects a positive result on management through its financial reports. Basically the mission to satisfy shareholders and business related entities such as banks and suppliers was accomplished by showing the ability to overcome financial problems through management based on the financial statements.However, the accounting practice can be a matter of numbers’ convenience and it can be altered just to show easy actions. 13. Overall, what is your assessment of Harnischfeger’s future as of 1984? The company is taking a risk by expecting that the one-time boost in income and cash in 1984 will enable the company to successfully expand internationally and grow in new high tech areas and become profitable once again. They wanted to make their financial statements look pretty so that investors would buy their stocks and suppliers would continue giving credit for being able to produce product and sell. They need to stop playing with account ing methods and hiding the true story otherwise they will be in danger to not survive in a long run.

Marketing baby food in Sweden Essay

In doing so it added three ingredients, â€Å"selenium† which is a substance that helps the body get rid of harmful oxidants since it is a proven antioxidant that has the capacity to turn harmful radicals that appear in the body into innocuous water and oxygen. The second ingredient it added was â€Å"nucleotides† whose main function is helping the growth of good bacteria in the gut so that the gut can fight bad bacteria and this ingredient is available in breast milk enabling children to build a natural immune system. And when children are using breast milk substitute formula, unless this substance is added they could be vulnerable to many kind of diseases, one of the reasons breast milk advocates had been highlighting, although it could be solved by simply introducing this substance into baby foods, which nestle did. The third ingredient was â€Å"beta-carotene† whose main function is to create a fortified immune system in the body since it is an antioxidant and it also helps in developing good vision early on, as well as it adds to the good development of the skin. [7] These are ingredients that are supposed to raise the eyebrows of mothers and their pediatricians who are mostly responsible for recommending what kind of baby food formula is good for the newborn children. From the outset the team knew that it has a winning product on its hand and this product is expected to cannibalize the regular Piltti in the long run, which is a little bit cheaper, but it is also presumed to beat many of the competing products that have not yet introduced functional baby food products in their baby food product line, even if their catching up quickly is imminent. However, until that happens the team was aware that there would be a window of time the company could do a quick profitable business. They have everything at their disposal except that they were aware of the WHO Code, which stipulates rules that make all the areas where an effective promotion could have taken place off limit. They are not allowed to have a direct contact with pregnant women or mothers of small children, although in today’s marketing campaigns that might not be essential, yet sometimes it is possible to come up with events where a close interaction between the marketing team and those who would be firsthand users of their product would have been possible. Because not only they can educate the mothers about their products but also they can give out samples and gifts that will build good relationship, which the code prohibits nonetheless. [8] It is not only that they cannot advertise using the known methods where they can put their ads on billboards, distribute brochures, or give out samples. All that can be carried out is through approved institutions by the WHO Code and if any of the allowed institutions are engaged in giving out free samples that are allowed to receive free samples from the manufacturers they have to make sure that there will be enough supply for the involved mothers for as long as they need it. This is so because this tactic had been highlighted where marketers and distributors of baby food products would usually start giving out free samples and if the mothers become dependent on it at the earlier stage of their breast feeding days and avoid breast feeding it will affect their ability to produce milk leading to their forced dependency on the substitute, which would mean they will be forced to buy the breast milk substitute products. Those who might not afford it could harm the normal growth of a child, which is a justifiable cause to be concerned about. [9] Therefore, there are very limited channels the marketing team could be promoting through and spotting those channels is very important. In addition, it is important the marketing team as well as the company should know that their new product should aim at those that are four months old and higher in normal circumstances and the only exception is when the mothers are not in a position to do breast-feeding for various reasons, there are no wet nurses, and at times access to breast milk banks might not be available since there are some of them in some communities. This would mean their marketing interaction is severely limited to interacting with health care personnel only and it is through them their would be customers will be educated to use their product as advertising to the general public is not allowed. Marketers do not have permission to show their existence at the point of sale, put posters, or any other means of advertising to promote their products. They cannot solicit mothers directly or indirectly or cannot give them gift nor free samples. Even if the health care system has the discretion of recommending the use of breast milk substitutes, they cannot allow their workplace for promoting any kind of such products. Nor any of the staff of such establishments have permission to accept any money from distributors and manufacturers of such products. But at least if the authorities see it beneficial they can make arrangement where pregnant women and mothers of young children to be educated or to be informed by a sales team, but the purpose of the meeting is far from pitching a product and it will be educational, where they will always be advised there is nothing better than breast-feeding for the newborn children. The labels on the products should not display a child’s picture and labels should clearly describe what the ingredients are, how to prepare it, and at what kind of temperature to store the product. In addition, they have to testify that the substitute does not come near to breast-feeding and the message will have to be to the point, without idealizing the breast milk substitute. The overall scenario when promoting baby food formula resembles medicine where there are go betweens who are the health officials and the authorities, and manufacturers of medicine target physicians when it comes to promoting their product since they are the ones who would subscribe it to their patients. Furthermore, almost no medicines are available without prescription, even if there are a few over-the-counter products. With the same token, even if the breast milk substitutes could find their way into grocery stores or even drug stores where anyone can pick them off the shelf without prescription, the consumers of such products could get their information from health workers only or from the labels that are required to follow some procedures, and marketers should not try to reach the direct consumers who are mothers of young born children or expectant mothers. Therefore, the team only had to approach a given number of institutions, mostly health establishments, where they are allowed to distribute their samples, gifts, and educational material so that the health officers will be informed about the benefit of their products and pass it on to the mothers of the young children. Due to this restriction the cost and the effort involved in marketing a baby food brand is not very high since they are not allowed to put billboards on the highways of several comminutes, or they do not have to advertise on TV, print, or are not allowed to print brochures and distribute them to the public, but they can pass such material to the health officials to help them with their educating the mothers. Hence, the undertaking would not be expensive since doing it in a continuous basis until the product becomes popular is not required as the case is when promoting other products. Instead, what is involved here is arranging an appointment with the involved officials or at times, all it might take is visiting these establishments in person that might number less than hundred. Since such officials are not allowed to ask any payment directly or indirectly that also saves the company a lot of money and it can focus only on samples and at times gifts, to be given to the mothers through the health officials in a form of utensils and the like. Nevertheless, giving physicians bonus is a common practice in the pharmaceutical industry since it is through them all the manufactures are selling their products. When it comes to baby food market it is not allowed, yet the sales team had started taking note to see if there will be some that will qualify in the long run for a preferential treatment and if there is a possibility of getting around the restriction to introduce a bonus even if the code prohibits it, but since it is a marketing scheme there has to be some way of compensating some of the health care workers who would choose to recommend the particular. Nestle product for their clients when there are other competing products, because even if Functional Piltti is new in the market, it might not take more than three months for the other manufactures to come up with similar products. Consequently, the job of the sales team is cut out for them where they have made a list of the establishments that are responsible for advising mothers and expectant women what kind of breast milk substitute to use. The job of the establishments that are medical and health care centers, hospitals and private pediatricians is to educate the mothers when to start mixing the breast milk substitute with their breast-feeding and what quantity and frequency to use, a knowledge they would acquire from the manufacturers and from their own experience as a health care officials. There is always a department at the bigger institution that will deal with the various marketers and when the need arises it is possible to arrange a one-on-one appointment and the promoting and the education process could take any form and any length of time. But the anticipated end result is in due time the company will start selling its products, either through the drug stores of big hospitals and health centers that can arrange to receive a shipment or the mothers will have to go and buy it from outside market once it is recommended to them by the health officers.

Oce 1 Essay Example | Topics and Well Written Essays - 1250 words

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Motorsports Research Paper Example | Topics and Well Written Essays - 2250 words

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Monetary Economics Essay Example | Topics and Well Written Essays - 750 words

Monetary Economics - Essay Example When the Fed lowers rates then we expect an increase in borrowing, when rates are reduced there is an expectation that inflation will rise, therefore inflation will increase when the rates are reduced. When the Fed lowers rates then we expect an increase in borrowing, an increase in borrowing means that there will be an increase in spending which will lead to an increase in output. An increase in output means that the economy will grow. When the Fed lowers interest rates this may result into an increase in money supply, n increase in money supply in the economy means that there will be a rise in expected inflation rate and therefore inflation rates are expected to increase. Calculation of future spot rate is complicated in that we assume that the 3rd year rate is equal to the five year rate, in the last calculation we consider two years which is the second and third year rate and also assume that the third year rate is equal to 2.04, the values provided are an estimate of what is expected by investors and this is because of uncertainties in future. The yield curve is a curve that depicts the yield or the cost of borrowing over time, the yield curve is an upward sloping curve and this means that if an investor invests his funds for a duration of t years then the yield will be a function of time, this means that the more the investor invests in terms of years then the higher is the yield. Prevailing interest rates which is the cost of borrowing will determine the position of the yield curve, in our case the chart shows that the yield curve has shifted downwards compared to the

Globalization Essay Example | Topics and Well Written Essays - 500 words - 18

Globalization - Essay Example In the recent past, globalization has been given impetus by a number of forces such as the rapid changes in communications (â€Å"Globalization†); the birth of new and sophisticated means of communication such as the telephone, and computer technology such as the internet and email has speeded up the process of globalization. With these new and efficient ways of communication, information, ideas and knowledge can be transmitted everywhere within seconds and this has led to increased connectivity and interdependence, thus globalization. Increased communication at international level has resulted to cross-cultural interactions between people and societies in general; it is now possible to transact business across the globe thus giving rise to what is now referred to as a global economy. The rapid changes in transportation have also been another factor that has led to increased globalization in the modern times (Pettinger); new and efficient means of transportation such as the airplanes, steamer ships, and electric trains among others have increased global connection and interrelatedness. It is now easier for people, goods, and ideas to move across national borders than it was before due to the increased ease in global transportation; in this regard, the whole world has been reduced into a global village due to the interconnectivity. Because of the increased ease of transportation, multinational corporations can now manufacture their goods and products in other countries and sell them across national borders. The increased connectivity and interrelatedness of global economies due to globalization has resulted to a number of effects, both positive and negative; for instance, multinational interactions have led to increased business opportunities and a global common market that is self-sustaining (â€Å"Effects of Globalization†). Multinational corporations can transact businesses

Microbiology and biotechnology Assignment Example | Topics and Well Written Essays - 1250 words - 1

Microbiology and biotechnology - Assignment Example This is to produce drug intermediates and produce vaccines or the drugs themselves (Baker, Nicklin and Griffiths, 2011). One application of gene therapy in medicine has been in treatment of type I diabetes. In the treatment, the researchers have used adenovirus as a vector to enable them delivers the gene for hepatocyte growth factor. Another application of gene therapy is in treatment of x-linked severe combined immunodeficiency (Baltz, Davies and Demain, 2010). This is a disease common in babies where they lack both T and B cells of the immune system and they are mainly exposed to infections. The applications are through non-viral vectors being tested for the gene therapy uses. The application include receptor on the goal cell, artificial chromosomes and naked DNA that is not linked to another molecule at all and can be directly injected into the cell (Baltz, Davies and Demain, 2010). Crude oil and its products are non-renewable and are considered to one day come to an end. Biofuel has been used as a replacement of crude oil as the source is renewable and produced from biomass. The approach that has been used to eliminate the use of crude oil is on the effects on the environment and the costs of the use (El-Mansi and Bryce, 2007). The approach is that biofuels may be easy to market than crude oil with consideration of performance, infrastructure and other factors. The other reasons for the approach are that biofuels play an important role in climate change and the important increase in production and use (El-Mansi and Bryce, 2007). Biotechnology has resulted to several advantages such as reduction in the costs of agriculture production as those in the sector are able to use fewer pesticides and herbicides in protecting their crops. The improved varieties are also able to increase the yield in a short duration. Increase food production has also been observed through the use of the method. There has also been ability to produce food in even times

Tax System Essay Example | Topics and Well Written Essays - 1000 words

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Food Nation Essay Example for Free

Food Nation Essay Food connotes more than just an intake to be able to sustain life. It is a reflection of a myriad of culture existing in a society. Looking at food, one can see its various fusions of cultural identities prepared to satisfy one’s appetite. Food is a perfect example of a world that enters into the process of globalization where nations embrace the flow of cultural exchange. Countries such as the United States and Italy are known for having diverse demographics. The diversity of its population brought influences into their food as well. However, although both countries may have fused each other’s culture into their food, there are still differences which make them distinct from each other such as how they handle and view food. The United States is one of the largest countries when it comes to its size and population. It has a wide variety of immigrants which flowed starting from the nineteenth century and as its population continues to grow, its culture has been as dynamic as its food (Counihan, 2002, p. 26). Large part of these immigrants later joined the American workforce as every parent became employed. The absence of either the mother or the father at home veered the majority of the population away from home-cooked meals. Eating out became an alternative for families to have their meals together and eating out means buying food from a restaurant (Schlosser, 2001, p. 4). From this concept of eating outside the confines of a home, the fast food world was born. The term â€Å"fast-food† refers to a speedy availability of food, further described as a â€Å"provision of limited, standard menu with quick service† (Royle Towers, 2002, p. 190). Fast food became not just a way to fill skipped meals at home but it turned out to be a lifestyle. The United States initially became known for its fast food because of the rise of popular food chains such as McDonald’s and Burger King. Its convenience of having ready-made food suits the lifestyle of people especially those who go to work early and go home late. Since there are a large number of working people in the United States, they flock to these restaurants to eat. Foods are being prepared in bulks to anticipate the huge numbers of customers. Most ingredients provided are delivered frozen. Cooking methods involved one or a couple of processes to guarantee its speed. Assembling ingredients in a line system like burger patties will be able to cook a dozen of it at the same time (Schlosser, 2001, p. 69). Some of the food ingredients only require adding hot water and it’s ready for preparation. Fast foods are usually packed in paper wraps, foil, and cartons. The materials of these wrappings are disposable which suites the people on-the-go to eat the food wherever they are. Despite the convenience brought about by fast food, healthier ingredients are being given up. As previously mentioned, ingredients are frozen which indicates that these are not fresh and devoid of its natural healthy components with much more added fats. Since Americans are busy with work with no time to prepare food for them, fast food becomes the next available fast option. Italians, on the other hand, became the center of what should be a counterpart of fast food. A country rich in culture, its food gained renowned identity throughout the world. Just like in the United States, Italian food is a lifestyle. It is a lifestyle which extends to close interaction with families and friends in a laid-back environment dining and drinking wine (Parasecoli, 2004, p. xii). The relaxed atmosphere among most Italian household can be seen as a break from the political and social unrest that reign the Italian state during history. Italian food is famous for the cheese, the wine, and the pasta. Made from a wide array of sea foods, vegetables, and meat; Italian food is prepared picking up the fresh ingredients and served as a craft of art. Ricotta, for example, is bought by locals straight from a shepherd on the day it is made (Harrison, 1989, p. 17). Italians regard their food not just as an energy provider but as a â€Å"medicine for the soul, one of life’s abiding pleasures† (Harrison, 1989, p. 17). Most of the Italian foods are cooked in accordance with traditions and the food preparation varies from the different regions of Milan and Florence (Harrison, 1989, p. 143). Taking this traditional view of Italian cuisine, a movement was established to retain not just the traditional cooking of the Italians but also all traditional cuisines of the world. The Slow Food movement is originally established as a counterpart of fast food. The idea of this movement is to make food from â€Å"scratch in your own kitchen† (Kummer, Cushner, Schlosser, 2002, p. 10) rather than the processed artificial food at fast food chains. Just like Italian food, the movement aims to take food as a pleasurable experience offered by life in contrary to fast foods (Pollan, 2008, p. 194). The Slow Movement suggests making food out of ingredients that are ideally grown in the backyard or farms, harvested, and cooked with other natural recipes. The people who eat the foods are not only consumers but co-producers as well. Just like the Italian food, this movement also promotes the pleasure of food eaten and shared communally (Pollan, 2006, p. 259). Though this movement proved to be promising, some may say that in contrast with fast-food, the Slow Food Movement is more expensive to obtain and to do. Since fast-food is more accessible and cheaper, the movement has been tagged as elitist and cannot be afforded by ordinary people (Kummer, et al. , p. 10). By its term of â€Å"slow-food,† this may not suit the lifestyle of most people coming from the working class due to the lack of time for food preparation. United States and Italy vary from the way they live their life with food. Though nowadays, some of their own cuisines have been inspired from one another. Their views of food have a huge gap as the two nations came from different backgrounds and developed cultures that set them apart from each other. Their cuisine style and food preparation became significant in the world today and though different in principles, people enjoy it nonetheless. References Counihan, C. (2002). Food in the USA: A Reader. New York: Routledge. Harrison, B. G. (1989). Italian Days.New York: Atlantic Monthly Press. Kummer, C. , Cusner, S. , Schlosser, E. (2002). The Pleasures of Slow Food: Celebrating Authentic Traditions, Flavors, and Recipes. USA: Chronicles Books. Parasecoli, F. (2004). Food Culture in Italy. Connecticut: Greenwood Publishing Group, Inc. Pollan, M. (2008). In Defense of Food: An Eater’s Manifesto. New York: The Penguin Press. Royle, T. Towers, B. (2002). Labour Relations in the Global Fast-Food Industry. New York: Routledge. Schlosser, E. (2001). Fast Food Nation: The Dark Side of the All-American Meal. New York: Houghton Mifflin Books.

Forensic Analysis Of A Playstation 3 Console Information Technology Essay

Forensic Analysis Of A Playstation 3 Console Information Technology Essay researching all the information that is available to me about the playstation 3 gaming system, from what the console connects to, the file structure of the hard disk, what features the system has e.g. internet, chat, email, online gaming. The deliverable that will be present at the end of this would be detailed research about the gaming system with everything that is needed to know to progress with the project. 2.2 Analysis the objective that I have for my analysis is to perform all the tasks that I have talked about (playing online games etc) then after each of these stages will then make an image of the hard disk of the system and look at the image in FTK to see if any changes have been made to the disk after the task has been completed. To illustrate an example of this would be to start a chat message with someone, then turn off the system remove the hard disk, image the hard disk, then load the image into FTK and look to see if any traces of the chat are present on the hard disk (date/time stamps). When writing up the findings of the investigation a document will be presented with all the processes went through, what tools used. The deliverable that I expect to have at the end of this objective would be disk images of the various tasks with a detailed report of my findings and a document showing all processes and tools used, and also a set of guidelines of how I found the evidence on t he system. If no evidence can be found on the HDD of the console then other areas of analysis will have to be explored from using different tools such as scalpel and photorec and also using different types of hardware like Bus Doctor. 2.3 Evaluation the objective for the evaluation is to forensically wipe the hard disk to the Playstation 3 system that was used, then giving this along with my guidelines and tasks completed to another person. The other person will go ahead and complete the series of tasks that were previously performed on the system, follow the guidelines and see if the they can find the same evidence as previously found, if the person can find the evidence that is in my guidelines then this proves that the guidelines created are correct. The deliverable at the end of this objective would be the test data of the other person which will then be written up, to show whether my guidelines are correct/incorrect. 3. Why gaming systems are an issue. In the recent years games systems have evolved immensely allowing the gamer to experience more realistic graphics and sound quality. This is because the systems have been updated to such a high standard some of what like a standalone computer, giving the user a lot more gigabyte/terabyte storage space, because of this the user has more room to store data on the disk whether it be images, videos or music. In relation to this the old Ps3 systems that were first released had the option to add another OS (operating system) on the hard drive so you could have Linux running on the system this means that the system can be used as a normal machine, Sony have no disabled this feature on the most current firmware of the console. A news report that was found on the ABC news website (http://abcnews.go.com/technology/story?id=7009977page=1) describes of how a user used his Playstation 3 system to get a young girl aged 11 to send dirty pictures of herself from her Playstation to his. It also says how the criminal threw his computer out as he didnt need it anymore. Using this example that has been found shows how criminals are adapting to the new technology and using it to their advantage to commit crimes. The growth of these gaming consoles means that they are more like a standalone computer coming standard with massive hard drives and encryption on the disks meaning that as forensics examiners it makes it harder to retrieve data from some of these devices and takes longer for the imaging process to complete. In regard to a forensic examiner the game systems are a big problem because the development of the consoles have evolved over the years and now contain multiple CPUs and graphics cards, and with the onboard storage that the same of a desktop computer users are able to save their pictures, music and video to these devices. Also using the features of the console from downloading and install the most current firmware and streaming media from a different network location. With the Playstation 3 you create a user/s for use with machine, so when the system is turned on it asks which user you would like to sign in as. With relation to the Xbox 360 console where hacking communities have found loopholes which allow the Xbox console to run unsigned code which means that the Linux OS can be booted up onto the machine allowing this console to be used just like a desktop PC. If Linux can be booted up onto the machine then this means it could be used for illegal usage example (file storage), although the first release of the Playstation 3 allowed this feature Sony have now stopped the boot of Linux and other Operating systems on its machines, but if a hack or loophole was found in their security then this would mean that this system could be used for malicious ways just like and Xbox or standalone PC. A post from January 26th, 2010 explains how hacker George Hotz has hacked the PS3 he revealed on his blog that he has achieved read/write access to the entire system memory and HV level access to the processor. If this is true then this means that the playstation can be used to run unsigned code and other o perating systems can be loaded onto the device, meaning that full desktop usage can be applied storing all kinds of information on the system. Also the Jailbreak that was leaked online was able to fool the system into thinking that a game was being played from a Blu-ray disc, but it was actually playing from the HDD, this could only be the start, people are making small but beneficial steps into fully hacking the Playstation 3 console. 4. Research 4.1 About the Playstation 3 The project that will be created will be about the analysis of the hard disk drive of a Playstation 3 console which is the most up to date console alongside the Xbox 360 and the Nintendo Wii. The Sony Playstation which is the next step in the gaming world provides the gamer with a new console to experience the most up to date graphics and high definition games and movies with the help of the consoles Blu ray drive. Since the console release in November 2006 the unit has sold over 38.1 million worldwide according to (http://www.eurogamer.net/articles/ps3-has-sold-38-1m-units-worldwide). Since the release of the console there have been many different models of the system from USB ports, Flash card readers and hard drive support, this means that the system and its components are always changing. All the games and movies that the console play are in the format of Blu ray this mean that the content that you are playing or watching are in the high definition format giving a more crystal clear picture and sound. 4.2 Online gaming. DSCI0056.JPG FIGURE 1 Picture of Playstation Store menu. The Playstaion 3 system offers the use of the internet whether it is a wired or wireless connection, because of this it is giving the user full access to the World Wide Web meaning they can access all the information that they would access on a standalone computer from social networking sites, videos, pictures etc. While playing games on the console you have the option on many games to play online this gives the user the capability to play the game of choice with other users of the game all over the world. To be able to do this you need to have a multiplayer capable of online game play, you must also have a Playstation network account which will give you access to other users and also need the Playstation to be connected to the wired/wireless internet. You can also create a Playstation network account where users are able to play online games with any person/s all over the world, they can add buddies and stay in close contact with the people they meet online either by email or chat. Because of the email and chat facilities available on the console it is just like a social networking site where people are able to exchange information with each other and possible pictures and other bits of material that can be deemed as illegal or offensive. The console also comes with full internet access via the browser the user can access any website that he/she wishes from the console and even downloading images, videos to the consoles hard disk drive. 4.3 The Hard disk. The hard disk in the Playstation 3 can come in various sizes from 40gb all the way up to a massive 320gb (factory), but there is an option to easily remove and replace the hard disk of the system, this can be done by purchasing a 2.5 5400rpm SATA hard drive which is the same hard disk used in laptop computers. To replace the hard drive of the system photocopies of the instruction manual are below. img013.jpg img014.jpg img015.jpg After these steps have been completed you then have a new HDD in your system whether it is a higher or lower capacity. Because the hard disk of the console is the same as the ones that they store in laptop computers the capacity of these disks can be great allowing a great deal of information such as images, videos or music to be stored on the disk to view with the console. A website was found (http://dcemu.co.uk/psgroove-payload-released-that-decrypts-firmware-files-by-graf_chokolo-346424.html) Where Graf_Chokolo has released a version of PSGroove payload, this allows the developers to see full details of the PS3 system firmware complete with decrypted contents. Graf_Chokolo goes onto to explain how to put the source code onto the system, he goes onto explain that my payload has two stages. The 1st stage is actually a PSGroove payload, which initializes the gelic device and allocates memory needed for the 2nd stage. Compile the 1st stage binary, convert it to C hex array and replace the PSGroove payload. (Appendix 16) Graf_Chokolo goes on to explain the second stage, this stage decrypts the CORE_OS_PACKAGE.pkg from a PUP file, it then runs some isolated SPU module or dumps FLASH, the binary of the file is then sent over the Ethernet with sendfile. The 1st stage receives the data and then stores it in a memory region of size 64kb, after the upload is complete, the 1st stage code jumps to the 2nd stage code and executes it. (Appendix 16) Another piece of information from this website is to be able to decrypt packages from a PUP file, first you need to extract a revoke list for the packages from PUP file 3.41 e.g. (RL_FOR_PACKAGE.pkg), then extract it convert it to C hex array and paste it into rvk_pkg_341.c. (Appendix 16) 4.4 Playstation 3 system updates With the use of the internet in the Playstation there is an option to keep the software of the system up to date this will provide you with the latest security updates, parental controls and the display options. By updating to the latest update you will enhance what the console is capable of. If you would like to find out the current software that your system is currently running you go to the settings category and then from there select system settings then system information within this the current system software will be displayed. You can update the current software of the system in a number of ways this is shown by the following methods. System update if the ps3 is connected to the internet got to settings then system update then click update via the internet the console will then check to see if there is an update available for the console if there is an update available it will download and install the update for you. There is also another option to update via the pc this is done by visiting the website eu.playstation.com you then follow the on screen instructions to download to the pc. After the download has finished you will then need to save the update to a ps3 compatible device either a memory stick/duo, USB drive or even a PSP console. Before putting the update into the system you will have to create a folder called PS3 then a folder called UPDATE once it has then been connected to the system you then navigate to system update then update via storage media. By allowing or accepting the system update new security can be put in place on the system, because Sony regularly release new firmware updates for the console the security of the device is constantly being updated. 4.5 Specifications Below are the specifications of the Playstation console. CPU Cell Broadband Engine GPU RSX Audio Output LPCM 7.1ch, Dolby Digital, Dolby Digital Plus, Dolby True HD, DTS, DTS-HD, AAC Memory 256MB XDR Main RAM, 256MB GDDR3 VRAM Hard disk 2.5 serial ATA 320GB Inputs/Outputs Hi-speed USB, USB 2.0 Networking Ethernet (10BASE-T, 100BASE-TX, 100BASE-T) x 1 IEEE 802.11 b/g Bluetooth 2.0 (EDR) Controller Wireless controller Bluetooth Resolution 1080p, 1080i, 720p, 576p, 576i HDMI OUT connector 1 AV MILTI OUT connector 1 DIGITAL OUT connector 1 BD/DVD/CD drive Read rate BD x 2 (BD-ROM) DVD x 8 (DVD-ROM) CD x 24 (CD-ROM) Power AC 200 -240 v, 50 / 60 HHHHz Power consumption Approx 230w External Dimensions Approx 290 x 65 x 290mm Mass Approx 3.0kg Operating temperature 5 35 degrees The Playstation 3 Console also includes RSA BSAFE Cryptographic software from RSA security Inc. RSA BSAFE software provides the security functionality necessary to allow developers to meet the stringent FIPS 140 and Suite Requirements for offering products to the U.S. government agencies. (Appendix 18) Many leading companies including Adobe, Oracle, Hypercom, Skyworks, Sony and Nintendo rely on RSA BSAFE software to provide the foundational security functionality by their respective software and device applications. (Appendix 18) RSA security protects the integrity and confidentiality of information throughout his lifecycle, RSA offers industry leading solutions in identity assurance and access control, encryption key management, compliance and security information management and fraud protection. (Appendix 18) http://www.rsa.com/node.aspx?id=1204 4.6 File Sharing The Playstation 3 console also allows the ability for you to share files via the console and your desktop computer, to be able to do this you need to make sure that both your computer and console are connected to the same network. If you would like to stream all the media from your windows media player like music, videos and pictures. You can do this by going into tools and options of windows media player and selecting library, then configure sharing you then check the box that says share my media to and your Playstation 3 will be in the list. In the settings tab of this you can then select which media that you wish to share music, pictures, video you then click ok. If you then turn on the console you will then see thumbnails of the compatible media that can be played on the system. http://www.wirelesshdadapter.com/wp-content/uploads/Media%20Server%20Ps3%20Software_2.jpg (Appendix 17) 4.7 previous work While completing research to find out if any other analysis of the Playstation console was carried out a paper was found published by the University of Central Florida where they conducted a Forensic Analysis of a Sony Playstation 3 Console, where they conducted a number of tests on the machine to see if any of the data could be extracted from the console. The tests that they completed where the following; An encryption test this test was to determine if it was possible to locate a picture once it had been copied to the console. The steps they took in completing this were to copy a image to a removable media, then plug this into the console and copy the image to the hard drive of the system, shut the console down and the image the hard drive. The next stage was to analyse the hard drive in FTK using its use of a data carving feature to see if the picture could be carved out of the image, although stated that FTK was unsuccessful in identifying files and folders on the partition (Appendix 6), even though only one tool was used while completing this task if other tools were used then maybe a different outcome would be found the tools that could be used alongside FTK to find the image could be scalpel or Photorec which are both data carving tools. The paper also talks about a write blocker test, where the hard drive was placed behind a write blocker before connecting the hard disk to the console, the consoles hard disk was then removed then placed behind a write blocker, then plugged into the console, the console was then turned on and they found that the console would power up but not boot up, by replacing the write blocker with a bridge the console was to power and boot up as normal. (Appendix 6) The test result then explains that the console must be able to write to the hard drive before it will boot up, though it also shows that the hard drive does not have to be directly connected to the console (Appendix 6) regarding the result of this test a write blocker cannot be placed between the hard drive and the console or the console will not boot up. Although many other tests were performed on the console all the test results were inconclusive or negative form this paper, they concluded in the end that Sony has successfully locked-down the PS3 By using other tools that are an alternative to FTK, these tools might be able to identify something that FTK is unable to do thus providing more information to data on the HDD of the console. Another paper called Xbox 360: A digital forensic investigation of the hard disk drive (Appendix 4) was written with details and findings of the hard disk drive of the Xbox 360, where a USB drive was plugged into the machine and using Bus Doctor to analyse what was being written between the Xbox console are the hard disk drive. And states that it is seamless and not as intrusive as mod chipping or installing other operating systems (Appendix 4). This method could be applied to the Playstation 3 console to see what is being written between the console and the hard disk drive of the Sony console. 4.8 Playstation 3 security architecture A pdf file was found that detailed the security architecture of the Playstation console, http://www.ps3news.com/PS3-Dev/playstation-3-security-architecture-pdf-released/ , the paper details that the system controller for the console if CXD2973GB and this is the hardware that is responsible for powering up the CBEA processor and it is directly connected via BIO/IF hardware bus. The console also contains a secure boot the secure boot of the CBEA includes random selected SPE in order to avoid sniffing per boot, a fake encryption/decryption state in all other SPE during secure boot to add fake sequence, a root key which is used to then decrypt the key vault and or the boot code (Appendix 15). The key vault of the Playstation 3 is an encrypted file containing all the keys to trust devices and processes, hard disk AES keys (Appendix 15). 5. Summary The research that has taken place shows all the relevant information about the Playstation 3 console, explaining what the machine allows you to do and how to update the firmware of the system. Although the system seems to be very secure, the images taken will be analysed to see if any relevant data can be taken from the disk these will be the objectives previously proposed, failing finding anything on the images of the HDD the console will be connected up to Bus Doctor a protocol analyser to see what is happening when the system is booted up and what data can be captured. Although a paper has been written on the analysis of the Playstation 3 console (appendix 6) new hardware and software have come to market since the paper was written in 2009, the PS3 Jailbreak has made its way by being able to run unsigned code on the console and giving the user power to copy games to the hard drive of the console. 6. Future Work/Where next After and image of the Playstation HDD was taken, it was then loaded into FTK forensic toolkit where the contents of the disk was looked at. After loading it into the software immediately it could be noticed that the hard disk was encrypted, searches were completed to see if any string of text and data carved items could be found on the disk the result was negative. More images of the hard disk will be taken when performing tasks then loaded into the FTK toolkit program if no strings of text can be found another approach will have to take place, the use of other programs that are available Scalpel and Photorec can be used to identify any interesting information on the HDD of the console. Another approach would be to try and capture what is going on with the system when it is booted up because the encryption must be deactivated when the system is booted up to allow the system access to the hard disk. The other data carving tools that could be used in combination with FTK will be scalpel and photorec. Scalpel which reads the database of the header and the footer definitions and extracts matching files from a set of image files or raw device. Scalpel will carve files from FATx, NTFS, ext2/3 or raw partitions. (Appendix 12) Photorec which is a data recovery tool to recover lost files on hard disks and other media, Photorec ignores the file system of the media and goes after the underlying data, so the software will still work if the medias file system has been severely damaged or reformatted.(Appendix 13). Bus Doctor which allows to capture what is being called/written to the hard disk when the console has been turned on this can provide good information to find out what is happening when the console is turned on. during the research a website was found that describes how the psjailbreak now supports 3.42 and 3.50, which allows the user to run unapproved content on the system (pirated games), and also allows for the running of the Linux OS on the system. They sister site of this company (www.psdowngrade.com) allows the downgrading of the firmware of the system, if the psjailbreak is applied to the console maybe the decryption key can be found and then lead to the decryption of the HDD of the system. This could be done by plugging in the psjailbreak and finding out what calls it makes to the system and possibly the decryption can be found from this method. Another method would be to connect the Playstation system up to a protocol analyser (busdoctor) this will capture what data is written when the system is booted up.