Bausch & Lomb, Inc.

(B&L)

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.
Q1. 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
Cr. Revenues
Dr COGS

$22 million
$22 million
$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

Total sales of B&L for 1993

= $1.8 billion

Increase in sales due to new sales strategy=$22 million

Net income of B&L for 1993 = $156.6 million
Increase in net income resulting from the new sales strategy=$12.1 million
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.
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.
The first question does not appear to be critical for B&L.
Revenues were recognized at the time of product shipment, which is
normal.
Remember that according to Exhibit 6, the percentage of U.S. soft contact
lens wearers using conventional lenses during 1992-93 is declining.

Q2. Does the new distribution and sales strategy make sense from an
operational stand point ? why or why not ?
The new distribution involves selling and delivering all conventional
lenses only through
distributors to all customers including large retail
customers.
Companys operational and financial strategies have a direct impact on the
accounting decisions.

Q3. Do you think the product shipments associated with B&Ls new
distribution strategy satisfied the FASB criterion for recognising
revenues? Why or why not ?
Considering the continuous growth In revenues and net income for the past
years according to exhibit 6, 1 and 2. Companies generally recognise revenues
at the time of product shipment. B&L has also lagged a formal return policy. The
sales strategy did not involve moving different line of business of geographic
area where new distributor relationships were being developed
As such reliability is not a concern because the case makes no such mention of
the company having distributor payment problems