Bausch & Lomb_case Analysis

FINANCIAL STATEMENT ANALYSIS

2009 – 10, Term VICA K.P.Rajendran

[email protected]

Bausch & Lomb, Inc. (A)

Case Analysis


Bausch & Lomb, Inc. (B&L) is a manufacturer of optical and health care products headquartered in New York.


The company implemented a change in their distribution and sales strategy near the end of 1993 that pushed a large amount of conventional contact lens inventories onto distributors.


B&L recognized the product shipments associated with the new strategy as revenues.


What is the impact of the December 1993 shipments of conventional lenses on the Bausch & Lomb 1993 financial statements? Is the impact significant?


Increase in net sales as a result of the new sales strategy = $22 million

Ratio of cost of goods sold (COGS) to net sales = 45%

COGS = 22*45% = $9.9 million

Bausch & Lomb, Inc. (A) Journal entries:

Dr. Accounts Receivable $22 millionCr. Revenues $22 million

Dr COGS $9.9 millionCr Finished Goods Inventory$9.9 million


Even though, the ratio of Selling, General and Administrative (SG&A) expenses to net sales is given as 33%, the exact amount of Selling, General and Administrative (SG&A) expenses resulting from the strategy is not given in the case. So it is impossible to determine as it is an indirect and allocated amount.


If we take the SG&A expenses as 33% of net sales, it would be:

$22million*33% = $7.25 million.


Increase in net income (excluding SG&A expenses) would be:

$22 million - $9.9 million = $12.1 million


Is this a big deal for B&L?


Total sales of B&L for 1993= $1.8 billion

Increase in sales due to new sales strategy=

=$22 million


Is the impact material?


Net income of B&L for 1993= $156.6 million

Increase in net income resulting from the new sales strategy

=$12.1 million


Is the impact material?


An information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.


While definitions of materiality may vary, it can be concluded that something is material if it would change the opinion of a relatively informed user of the financial statements.


Materiality depends on the question being asked, requiring management to attempt to anticipate all of the various ways the information may be used before determining if it is material.


Does the new distribution and sales strategy make sense from an operational standpoint?

Why or why not?


What is the current distribution and sales strategy of B&L?


The current distribution and sales strategy of B&L involves selling and delivering directly to large retail customers, while using distributors to service the many smaller retail customers.


What is the new distribution and sales strategy of B&L?


The new distribution and sales strategy of B&L involves selling and delivering all conventional lens only through distributors to all customers including large retail customers.


Whether this change makes sense from a business or operational perspective?


Will the new strategy really free up resources to focus on new items?


How will the larger retail clients respond to the need to deal with distributors for this one tem?

Remember these high volume customers would be continuing to deal with B&L directly for many of their other purchases.


Do the distributors have the operational knowledge and financial acumen to manage this large block of inventory?


A company’s operational and financial strategy have a direct impact on the accounting decisions.


Do you think the product shipments associated with B&L’s new distribution strategy satisfied the FASB criteria for recognizing revenues? Why or Why not? (Exhibit 7 od case study describes the FASB criteria for recognition of revenues and gains).


In other words do you consider this transaction should be recorded as revenue?


Whether a company can recognize revenues centers upon two basic questions.


First, has the company accomplished what it must do in order to enjoy the benefits of the revenue?


Second will the revenues ever be realized?


The first question does not appear to be critical for B&L.

Revenues were recognized at the time of product shipment, which is normal.


The second question about realizability: Is the realizability a suspect?


Would you think that B&L was not justified in recognizing revenues because of concerns over realizability claim that the year-end timing of the sales strategy is suspect?

Remember that according to Exhibit 6


Remember that according to Exhibit 6, the percentage of U.S. soft contact lens wearers using conventional lenses during 1992-93 is declining.


Exhibits 1 and 2 shows that net sales and earnings are continuously increasing from 1982 to 1993.


Considering the continuous growth in revenues and net income for the past years, Would you think that the sales strategy was motivated by pressure to continue showing a positive trend in operating performance, especially under decreasing sales scenario of conventional lenses?


Or do you consider that the timing issues alone do not impact the eventual payment of the amounts owed by the distributors?


Companies generally recognize revenues at the time of product shipment.

B&L has also lacked a formal return policy.

The above aspects justify B&L’s accounting choice of recognizing the revenues.


The sales strategy did not involve moving different line of business or geographic area where new distributor relationships were being developed.


As such, realizability should not have been a concern because the case makes no mention of the company ever having distributor payment problems and the distributors all have long histories with B&L.


The company also received a clean audit opinion in 1993 (Refer Exhibit 8) which again justifies B&L’s accounting choice.


Remember B&L can also sell accounts receivable attributable to the sales strategy for cash to a factor (otherwise known as factoring).


Factoring, allows companies to meet more stringently the realizability criterion for recognizing revenue.


Accounting often requires use of judgment and sometimes accounting choices are difficult to make.

Bausch & Lomb_case Analysis

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