Case: Biovail Corporation: Revenue Recognition and FOB Sales Accounting (critical essay)
Read the Biovail Corporation: Revenue Recognition and FOB Sales Accounting case study.
Biovail Corporation, a major Canadian pharmaceutical company listed on the New York Stock Exchange, announces that it will miss its quarterly earnings target by $25 to $45 million, blaming $10 to $15 million of the shortfall on a truck accident involving a shipment that left its facility on the last day of the quarter. The case was ultimately prosecuted by the U.S. Securities and Exchange Commission (SEC). The case is centered on the question of revenue recognition and how the company should have accounted for the sales (FOB company or FOB destination). However, it also provides a rich setting permitting exploration of peripheral topics around the ethics of earnings management. For example, the case discusses stock analysts' reactions to the announcement; questions how much product was actually in the truck; questions how aggressively the company responds against the analysts who downgrade the stock; and highlights the role of the SEC in enforcement.
The primary objective of this assignment is to explore the concepts of revenue recognition. Secondary points of interest include management of information flows to the capital markets, relationships with analysts and the enforcement role of the SEC.
Write a 5- to 6-page paper that addresses the following:
- How many truckloads are actually required to carry $10 million of products? Show your calculations.
- How should the company recognize revenue based upon the two possible FOB contract structures mentioned in the case? Why?
- How does the accident impact the stated revenues under the different FOB contract structures?
- Are you concerned about the company's treatment of analysts who cover the stock? Would you want to be an analyst covering this company? Why?
Include a description of your approach to the issues and your solutions to the problems described in the case.
Your paper should meet the following requirements:
- 5 to 6 pages in length, not including title and reference pages
- Include at least 3 credible outside reference sources
- Use 12 font size and double spaced.
Reference for this Critical Thinking Assignment:
Chapman, C.J. (2009). Biovail Corporation: Revenue recognition and FOB sales accounting. HBS No. 4011-HCB. Boston, MA: Harvard Business School Publishing.
See the attached file to my post at Transtutors that has the case study for this assignment.