Lucent Case Study

Lucent Case Study

Why the market reacted so negatively to Lucent’s announcements of the problems?

* The revenue recognition problem in Lucent might give indication to analysts that the board tried to manage the profit.

* By managing profit, Lucent could cover the underperformance that the company experienced due to failure to foresee rapid switch to fiber optic.

* Lucent tried to sell its equipment and recognizing revenue before it was passed to the customer. This raised a suspicion that Lucent tried to boost its profit.

* Lucent reported series of layoff and restructuring. Also, failed to meet earning projection for 2 consecutive quarters. This also raises negative response to analysts.

* With all of these factors add up, it was obvious that Lucent had already lost its credibility as company and as going concern. These acts gave a red flag signal to analysts and investors.

What financial adjustment will Lucent have to make to correct the revenue recognition problems announced in late 2000?

* Equipment selling

* Asset balance will be down, Acc Receivable down, Equipment up, depreciation exp up, profit down.

* Unearned Revenue

* Revenue down, COGS down, tax exp down, profit down.

* Unearned rev down, Inventory up, Deferred tax down, equity down.

How would you judge whether a firm is likely to face revenue recognition problems?

* When company is facing underperformance for several quarters consecutively, there is a bigger chance that the company recognizes its revenue prematurely.

* When suddenly the provision for doubtful debt increase significantly.

* When there is a significant gap between revenue in one period relating to the next period.

Assess whether any of Lucent’s competitor are likely to face revenue recognition problems in the coming quarters.

* Based on the analysis using percentage of allowances for doubtful debt, Cisco might have the same problem as Lucent since it has increase its...