Question

Topic: 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 over the direct write-off method;
2. What accounting principle and basis of accounting (cash or accrual) justifies the allowance method; and
3. The position of GAAP as to what method (allowance or direct-write-off method), particularly for large companies with sizeable amount of receivables, companies should use, and why.

Answer 1

Answer :

Suggested Grading Concepts and Grading Scheme:

Content  (70%)

_______     40     Explains the difference between the allowance method and the

                            direct write-off method.

                                         Direct write-off more objective.

                                         Direct write-off has potential to violate the matching

                                         principle.

_______     15     Even if uncollectibles are fairly stable, when significant

                            variations do occur, profit will be overstated in one period

                            and understated in another period.

_______     15     Even if uncollectibles remain constant, the direct write-off

                            method will result in an overstatement of accounts receivable

                            in the balance sheet.

               ______

_______     70 points    

Writing (30%)

_______     6       Terminology and tone appropriate to the audience of a

                            company president.

_______     12     Organization permits ease of understanding.

                                         Introduction that states purpose.

                                         Paragraphs that separate main points.

_______     12     English

                                         Sentences grammatically clear and well organized,

                                                     concise.

                                         Word selection.

                                         Spelling.

                                         Grammar and punctuation.

               ______

_______              30 points