Historically, your company has calculated bad debts using an aging of accounts receivable. Near the end of the fiscal year, the company is in a cash crunch and needs to borrow money from the bank, using accounts receivable as collateral. The owner of the company knows that many of the accounts receivable are more than 90 days past due, resulting in net receivables equal to only 80% of total receivables.
Respond to the following in a minimum of 175 words:
- The owner asks you to change the method of estimating bad debts to a flat 3% of receivables. What should you do?