You have been hired as a consultant by a parts manufacturing firm to provide advice in regards to the proper accounting methods the company should use in some key areas. In the area of receivables, the company president does not understand your recommendation to use the allowance method for uncollectible accounts. She stated, “Financial statements should be based on objective data rather than the guesswork required for the allowance method. Besides, since my uncollectibles are fairly constant from period to period, with significant variations infrequently, the direct write-off method is just as good as the allowance method.”
Draft a one-page response to the president, in the form of a memo, to support your recommendations for the company to use the allowance method. In your response, present the positives and negatives of both the allowance and direct write-off methods, and be as persuasive as possible.