Bausch and Lomb, Inc (a)

1057 words 5 pages
1. What is the impact of the December 1993 shipments of conventional lenses to Bausch and Lomb 1993 financial statements? Is the impact significant?

The impact was:-
i) Increased revenue by $22M ii) Reduced inventory by 1.8 million pair. Based on the COGS of 45%, this could mean a reduction in inventory of close to $10M. iii) There is very little increase in SG&A as not much was spend in terms of sales effort. iv) AR increased significantly with some of the promissory notes are payable in June 1994 (6 months after sale)
v) Probably increase marketing, promotional and expenses related to discounts in the subsequent year due to “Premier Vision” plan.

This impact is significant.
From the statements, B&L reported a 13% YoY increase in sales
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In conclusion, it does appear that the disadvantages far outweigh the advantages. Thus it does not make operational sense in the longer term though the initial revenue recognition is high. It might be more advantageous for B&L to stick with the old method of distribution and sales for the conventional lens.

3. 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?

According FASB, revenue is only recognized when it is both realized (and realizable) and earned. Revenue is realized (or realizable) when products are exchanged for cash or for assets that are readily convertible to cash. Based on the above definition, the new distribution strategy per se satisfied the FSAB guidelines. The distributors received their products and they signed promissory notes which can be realized in to cash.

There is however lack of information with regards to the existence of any buyback agreements between B&L and the distributors and the actual percentage of returns of conventional lens. If such buy back agreements were in place, B&L should not recognize the revenues at the point of sale to the distributors if buyback price covers all costs of the inventory plus related holding costs because the inventory remains on the seller’s books. Likewise, if B&L cannot reasonably estimate the amount of future returns and/or have extremely high rates of returns,