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 uncollectible 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 TO ANSWER: 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 over the direct write-off method;

2. What accounting principle and basis of accounting (cash or accrual) justify the allowance method; and

3. The position of GAAP as to what method (allowance or direct-write-off method), particularly for large companies with a sizable amount of receivables, companies should use, and why.