Please help I need something that isnt alreeady in chegg for

Please help, I need something that isnt alreeady in chegg for this,

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.

Solution

Hello Ma’am

Here is an insight into both the methods

An advantage of using the direct write-off method is that it is simple. Companies only have to make two transactions for the amount of the customer’s bad debt. Another advantage is that companies can write off their bad debt on their annual tax returns. A disadvantage of the direct write-off method is the possibility of expense manipulation because companies record expenses and revenue in different periods. Therefore, companies should only use this method for small amounts that do not significantly impact financial records. Another disadvantage is that the balance sheet is not an accurate representation of the company’s accounts receivable. Thus to represent balance sheet accurately direct write off method cannot be used.

2. Allowance method: Management uses the allowance for doubtful accounts method to estimate credit accounts that customers will not pay. Companies don\'t immediately write off accounts. Instead, management uses past financial information to estimate bad debt amounts.

An advantage of the allowance method is that it follows the matching principle, which allows for accurate financial records. Another advantage is that the balance sheet accurately reports accounts receivable, which benefits investors and management. A disadvantage is that management might inaccurately estimate write-offs by a large margin, which can cause companies to misstate net income. but accurate past experience of the management can help to accurately estimate the allowance to be made.

Thus to accurately prepare the balance sheet and Income statement and to record all revenue and expenses in the same period they accrued, Allowance method should be used.