Final answer:
Firms tailor their approach to estimating bad debt expense based on their individual situations and guidelines, rather than strictly adhering to a single method. They incorporate the possibility of loan defaults into financial planning to mitigate risks, especially in the event of an economic downturn.
Step-by-step explanation:
Do firms normally use one or the other method for estimating bad debt expense? Each business has its own approach to handling potential loan defaults, but in general, businesses must prepare for the possibility that some loans will not be repaid. It is not a question of using one method over the other, rather, businesses often use guidelines that help in understanding financial risk and planning accordingly. Companies include estimates of unrecoverable debts within their financial planning strategies, mindful of the risk that the actual number of loan defaults may exceed expectations, especially during economic downturns. As illustrated with the example from the text, if 'Safe and Secure Bank experiences unexpected defaults causing a significant drop in the value of its loans, it could result in negative net worth due to the reduced assets. Therefore, while there may be different methodologies for estimating these figures, companies often tailor their approach to best match their situation and the economic climate they operate.