The Use of the Allowance Method of Accounting for Bad

question 107

Multiple Choice

The use of the allowance method of accounting for bad debts is preferred over the direct write- off method because of the:

• A)historical cost principle.
• B)full disclosure principle.
• C)matching principle.
• D)revenue recognition principle.

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Definitions:

Fixed Costs

Expenses that do not change with the level of production or sales activities, within a relevant period.

Variable Cost

Costs that vary in total in direct proportion to changes in the level of activity or volume of production.

Operating Leverage

The degree to which a firm or project can increase operating income by increasing revenue, reflecting the proportion of fixed costs to variable costs.

Financial Leverage

The use of borrowed funds to increase the potential return of an investment, which can also increase the risk of loss.