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 of 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 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. Your memo should include:

1. The advantages of the allowance method;

2. What accounting principle and basis of accounting (cash or accrual) justifies this method; and

3. The position of GAAP as to what method, particularly for large companies with sizeable amount of receivables, companies should use.