FINANCIAL STATEMENT

ANALYSIS
2009 10, Term VI
CA K.P.Rajendran
kprajen@gmail.com

Bausch & Lomb, Inc. (A)



Case Analysis
Bausch & Lomb, Inc. (A)
Bausch & Lomb, Inc. (B&L) is a
manufacturer of optical and health
care products headquartered in New
York.
Bausch & Lomb, Inc. (A)
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.
Bausch & Lomb, Inc. (A)
B&L recognized the product
shipments associated with the new
strategy as revenues.
Bausch & Lomb, Inc. (A)
What is the impact of the December
1993 shipments of conventional
lenses on the Bausch & Lomb 1993
financial statements? Is the impact
significant?
Bausch & Lomb, Inc. (A)
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 million
Cr. Revenues $22 million

Dr COGS $9.9 million
Cr Finished Goods Inventory$9.9 million

Bausch & Lomb, Inc. (A)
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.
Bausch & Lomb, Inc. (A)
If we take the SG&A expenses as
33% of net sales, it would be:

$22million*33% = $7.25 million.
Bausch & Lomb, Inc. (A)
Increase in net income (excluding
SG&A expenses) would be:
$22 million - $9.9 million
= $12.1 million
Bausch & Lomb, Inc. (A)



Is this a big deal for B&L?
Bausch & Lomb, Inc. (A)
Total sales of B&L for 1993
= $1.8 billion

Increase in sales due to new sales
strategy=
=$22 million
Bausch & Lomb, Inc. (A)



Is the impact material?
Bausch & Lomb, Inc. (A)
Net income of B&L for 1993
= $156.6 million

Increase in net income resulting from
the new sales strategy
=$12.1 million
Bausch & Lomb, Inc. (A)



Is the impact material?
Bausch & Lomb, Inc. (A)
An information is material if its
omission or misstatement could
influence the economic decisions of
users taken on the basis of the
financial statements.
Bausch & Lomb, Inc. (A)
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.
Bausch & Lomb, Inc. (A)
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.
Bausch & Lomb, Inc. (A)
Does the new distribution and sales
strategy make sense from an
operational standpoint?
Why or why not?
Bausch & Lomb, Inc. (A)
What is the current distribution and
sales strategy of B&L?
Bausch & Lomb, Inc. (A)
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.
Bausch & Lomb, Inc. (A)
What is the new distribution and sales
strategy of B&L?

Bausch & Lomb, Inc. (A)
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.

Bausch & Lomb, Inc. (A)
Whether this change makes sense
from a business or operational
perspective?
Bausch & Lomb, Inc. (A)
Will the new strategy really free up
resources to focus on new items?
Bausch & Lomb, Inc. (A)
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.
Bausch & Lomb, Inc. (A)
Do the distributors have the
operational knowledge and financial
acumen to manage this large block of
inventory?
Bausch & Lomb, Inc. (A)
A companys operational and financial
strategy have a direct impact on the
accounting decisions.
Bausch & Lomb, Inc. (A)
Do you think the product shipments
associated with B&Ls 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).
Bausch & Lomb, Inc. (A)
In other words do you consider this
transaction should be recorded as
revenue?
Bausch & Lomb, Inc. (A)
Whether a company can recognize
revenues centers upon two basic
questions.

Bausch & Lomb, Inc. (A)
First, has the company accomplished
what it must do in order to enjoy the
benefits of the revenue?
Bausch & Lomb, Inc. (A)
Second will the revenues ever be
realized?
Bausch & Lomb, Inc. (A)
The first question does not appear to
be critical for B&L.
Revenues were recognized at the
time of product shipment, which is
normal.
Bausch & Lomb, Inc. (A)
The second question about
realizability: Is the realizability a
suspect?
Bausch & Lomb, Inc. (A)
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
Bausch & Lomb, Inc. (A)
Remember that according to Exhibit
6, the percentage of U.S. soft contact
lens wearers using conventional
lenses during 1992-93 is declining.
Bausch & Lomb, Inc. (A)
Exhibits 1 and 2 shows that net sales
and earnings are continuously
increasing from 1982 to 1993.

Bausch & Lomb, Inc. (A)
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?
Bausch & Lomb, Inc. (A)
Or do you consider that the timing
issues alone do not impact the
eventual payment of the amounts
owed by the distributors?
Bausch & Lomb, Inc. (A)
Companies generally recognize
revenues at the time of product
shipment.
B&L has also lacked a formal return
policy.
The above aspects justify B&Ls
accounting choice of recognizing the
revenues.

Bausch & Lomb, Inc. (A)
The sales strategy did not involve
moving different line of business or
geographic area where new
distributor relationships were being
developed.
Bausch & Lomb, Inc. (A)
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.
Bausch & Lomb, Inc. (A)
The company also received a clean
audit opinion in 1993 (Refer Exhibit
8) which again justifies B&Ls
accounting choice.
Bausch & Lomb, Inc. (A)
Remember B&L can also sell accounts
receivable attributable to the sales
strategy for cash to a factor
(otherwise known as factoring).
Bausch & Lomb, Inc. (A)
Factoring, allows companies to meet
more stringently the realizability
criterion for recognizing revenue.
Bausch & Lomb, Inc. (A)
Accounting often requires use of
judgment and sometimes accounting
choices are difficult to make.