1. An article in The Wall Street Journal on January 26, 1995 reported on questions raised by the SEC about Bausch & Lomb Inc.s premature recording of revenue from products shipped to distributors in 1993. Bausch & Lomb oversupplied distributors with contact lenses and sunglasses at the end of 1993 through an aggressive marketing plan, and was forced to buy back a large portion of the inventory [in 1994] when consumer demand didnt meet expectations.

The oversupply amounted to around $10 million, which Bausch & Lomb claimed was not material. In addition, the article points out that in the fourth quarter of 1994 Bausch & Lomb had incurred $20 million in one-time expenses, which included expenses from previously announced staff cuts of about 2,000. Also, in the fourth quarter Bausch & Lomb took a $75 million charge in its oral-care division in order to reduce unamortized goodwill that it recorded when Bausch & Lomb bought the business in 1988. Many analysts are saying that Bausch & Lomb are looking to sell the oral-care division, and this reduction of unamortized goodwill will make the division look better.

Required

1. What earnings management policy did Bausch & Lomb appear to be following in 1993? (1 mark)

2. Evaluate revenue recognition policy as an earnings management device. (3 marks)