Question

The materiality constraint, as applied to bad debts:a Permits the use of the direct write-off method when bad debts expenses are relatively small.b Requires use of the allowance method for bad debts.c Requires use of the direct write-off method.d Requires that bad debts not be written off.e Requires that expenses be reported in the same period as the sales they helped produce.

Answer 1

Answer:

A) Permits the use of the direct write-off method when bad debts expenses are relatively small.

Explanation:

The materiality constraint is used to determine whether a business transaction is relevant or not to the financial results of an organization. The materiality constraint is not a given threshold, it varies depending on the size of an organization.

For example, a $10,000 transaction may not be materially important to a multinational corporation, but will be extremely important to a sole partnership.

All transactions that exceed the threshold set by the materiality constraint must be included in the financial statements of the organization.