Introduction:
The case study on “Note on Correcting Sight and Accounting at LCA-Vision Inc.” by Justin J. Hopkins highlights the issues faced by the company regarding the accounting of its vision correction procedures. The company, LCA-Vision, provides laser vision correction services to its patients, and it was recording the revenue from these procedures upfront, despite a two-year warranty period where patients could come back for touch-ups. The case study discusses the accounting standards and practices that should be followed by the company to ensure accurate financial reporting.
Case Issue:
The primary issue in the case study is the accounting of the vision correction procedures provided by LCA-Vision. The company was recording the revenue upfront, even though it was obligated to provide touch-up services for up to two years after the initial procedure. This was leading to a misrepresentation of the company’s financials, as the revenue recorded did not accurately reflect the services provided by the company.
Case Analysis:
The case study highlights the importance of following accounting standards and practices to ensure accurate financial reporting. The revenue recognition principle states that revenue should only be recognized when it is earned, and the company has fulfilled all obligations related to the sale. In the case of LCA-Vision, the revenue recorded upfront did not meet this criterion as the company was obligated to provide touch-up services for up to two years after the initial procedure.
To ensure accurate financial reporting, the company should adopt the matching principle, which requires that expenses should be recorded in the same period as the revenue they generate. In the case of LCA-Vision, the touch-up services provided within the two-year warranty period should be recorded as a deferred revenue liability in the year of the initial procedure. This deferred revenue should then be recognized as revenue in the period in which the touch-up services are provided.
The case study also highlights the importance of internal controls to ensure compliance with accounting standards and practices. LCA-Vision should implement internal controls to ensure that its accounting practices are in compliance with accounting standards and that all employees involved in financial reporting are aware of these practices.
Conclusion:
The case study on “Note on Correcting Sight and Accounting at LCA-Vision Inc.” highlights the importance of following accounting standards and practices to ensure accurate financial reporting. LCA-Vision was recording revenue upfront for its vision correction procedures, despite being obligated to provide touch-up services for up to two years after the initial procedure. The company should adopt the matching principle to ensure that expenses are recorded in the same period as the revenue they generate, and deferred revenue should be recognized as revenue in the period in which the touch-up services are provided. Internal controls should also be implemented to ensure compliance with accounting standards and practices.
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Recommendations:
- LCA-Vision should adopt the matching principle to ensure accurate financial reporting.
- The company should record deferred revenue liability for the touch-up services provided within the two-year warranty period and recognize this as revenue in the period in which the touch-up services are provided.
- Internal controls should be implemented to ensure compliance with accounting standards and practices.
- The company should train its employees involved in financial reporting on accounting standards and practices.
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