How old is your daughter? What is her/your goal for her? College scholarship, international elite, olympics? Assuming she is in the traditional age range of a level 5-6 then to answer your question, yes. Yes it is normal or at least not extraordinary for your daughter to be competing level 5 and the rest of her team to test out. It doesn't mean she is not getting attention from coaches, it doesn't mean she is wasting her potential. You do make somewhat of a contradiction. On one hand you say she is doing L8 bar skills and all 6/7 skills, but on the other you say you don't know much about the sport and are trying to educate yourself. Knowing specific skills for different levels is next level knowledge for a parent. Now maybe your child has told you she has done these things. But I would caution that doing a skill once, with poor form, heavy spotting etc does not mean skill attainment or proficiency in a skill.
At this age, there is a wide variability of performance of girls, some are late bloomers and come on strong at higher levels, others are early bloomers, but fade out at higher levels, still others are on a consistent upward trend. Given the wide range, I would not see your coaches actions as exceptional. Nor would I be particularly concerned (again assuming she falls in the average age range, you haven't told us any specific information) about doing 5 and then going on to 6 or 7. Of course at the end of the day, you have to do what you feel is best for your child. All I am trying to say is that at this age, your coach is right, all the long-term goals are attainable (except maybe olympics) given a generic situation of an athlete at L5. I totally understand the group think panic that happens in parent observation rooms when the chatter happens and then you start wondering if your child is being left behind or why are they not doing X,Y,and Z like the others are. Unless there are other extenuating circumstances that you haven't shared, just listen to coach and maybe stay away from parent room.