Bausch Lomb Case Analysis

FINANCIAL STATEMENT
ANALYSIS
2009 – 10, Term VI

CA K.P.Rajendran
kprajen@gmail.com
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

 Journal entries:
Dr. Accounts Receivable $22 million

Cr. Revenues $22 million
Dr COGS $9.9 million

Cr 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.

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FINANCIAL STATEMENT

2009 – 10, Term VI

Ratio of cost of goods sold (COGS) to

COGS = 22*45% = $9.9 million

Dr. Accounts Receivable $22 million

Dr COGS $9.9 million

$22million*33% = $7.25 million.

Is this a big deal for B&L?

Increase in sales due to new sales

Is the impact material?

Increase in net income resulting from

Is the impact material?

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