You have been hired as a consultant by a parts manufacturing firm to provide advice as to the proper accountingmethods the company should use in some key areas. In the area of receivables, the company president does notunderstand 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 occurringinfrequently, the direct write-off method is just as good as the allowance method.”Required:Draft a one-page response in the form of a memo to the president in support of your recommendation for the company to use the allowance method.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
You have been hired as a consultant by a parts manufacturing firm to provide advice as 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 occurring
infrequently, the direct write-off method is just as good as the allowance method.”
Required:
Draft a one-page response in the form of a memo to the president in support of your recommendation for the company to use the allowance method.
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