Please critique the following from the view of managment financial decisions in

Question

Please critique the following from the view of managment financial decisions in crises and relate thme to accounting practices:

From time to time, public companies will report a net loss when expenses and costs exceed revenue in an accounting period. A great example of an organization that has reported an annual net loss within the past three years is Vertex Pharmaceuticals. It is a Boston based biotechnology company, which focuses on specialty markets such as cystic fibrosis treatments for patients under the age of six (Mitra, S., 2017). Vertex Pharmaceuticals founded in 1989 and they ended up with 1830 employees as of December 31, 2014. Unfortunately, Vertex revenues dropped sharply from $1.2 billion in 2013 to $580 million in 2014. Therefore, the company lost $738.6 million in 2014 (Vertex Pharmaceutical Incorporated., n.d.). The Management Discussion and Analysis of Financial Condition and Results of Operations section of Vertex Pharmaceuticals Annual report indicates that one of the medicine was the reason for the rapid loss. In the fourth quarter of 2013, the company withdrew Incivek from the U.S. market after patients reported serious skin reactions. As a result revenues from Incivek fell from $1.2 billion 2013 to $580 million in 2014. Vertex Pharmaceuticals had to find different way to cover the loss. With the withdrawal of Incivek, Vertex is concentrating on its CF medications for patients over age six, and a separate medication for CF patients 12 and older (Lieberman, Mark and Frohlich, Thomas, C., 2015). References: Mitra, S., (October 10, 2017). Vertex Pharmaceuticals: Excellence In Cystic Fibrosis, Strong Potential Ahead. Retrieved from https://seekingalpha.com/article/4112756-vertex-pharmaceuticals-excellence-cystic-fibrosis-strong-potential-ahead Lieberman, Mark and Frohlich, Thomas, C., (May 1, 2015). Vertex Pharmaceuticals Incorporated (Nasdaq: VRTX). Retrieved from http://247wallst.com/special-report/2015/05/01/15-companies-losing-the-most-money/3/ Vertex Pharmaceutical Incorporated., (n.d.). Retrieved from www.vrtx.com

Explanation / Answer

Analysis of management financial decision under crisis and accounting practice :

Issue : Vertex Pharma. made and reported loss since past 3 years, from 2013 to 2014, there is drastically drop in revenue. Management analyzed that one medicine has caused this sudden drop in revenue and now concentrating on development of another medicine for 2 different age groups.

Analysis of management conclusion : In my opinion, management should have waken up before 2 years when first time Vertex has made and reported loss. Management should have gone in to deeper analysis for loss which could have been failure of product, excess manpower, loss of market share, competition, excess overheads. When there is drop of business there should be corresponding reduction in material cost and variable overheds. If it is not so, then there is something wrong in company operations. It means company is creating inefficiency in to it. Further, company cannot rely on only one product which has such a high contribution to overall revenue.

Apart from this, from accounting perspective, company should check that whether they have provided reasonable provisions for tax as well as other future losses or company has provided excess provisions. Has company recovered their accounts receivable dues in time or delayed which caused hit to the cash flow. Has company recognized revenue as per correct accounting practice or not.

Hence, company management should analyze operations, employee activities as well as accounting books for last 3 years and should take steps towards revival of company.

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