Which of the Following Is NOT an Example of the Anchoring

question 11

Multiple Choice

Which of the following is NOT an example of the anchoring effect (i.e., choices are affected by spurious information) ?

• A) The French and British governments completed construction of the Concorde because they had so much money tied up in research and development that would have been wasted if the project were cancelled.
• B) People are reluctant to sell stock they have received as a gift even if they would not have chosen to purchase the stock.
• C) Investors purchase shares of a stock on plausible rumors of increased future earnings.
• D) Investors liquidate common stock and hold cash because they fear that the stock market will fall because the American League won the World Series.
• E) a. and c. are correct.

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Definitions:

Bad Debts Expense

An expense account reflecting the cost of accounts receivable that a company does not expect to collect.

Direct Write-Off Method

The method of writing off uncollectibles when they occur and thus not using the Allowance for Doubtful Accounts. This method does not fulfill the matching principle of accrual accounting.

Income Statement Method

A technique used to create a company's income statement to report earnings and financial performance.

Income Statement Approach

A method that estimates the amount of Bad Debts Expense that will result based on a percentage of net credit sales for the period. The amount of the expected bad debt is added to the existing balance of Allowance for Doubtful Accounts.