Explanation:
The correct answer is C. When total accruals are regressed on the growth in credit sales with no residual, it means that all of the total accruals are explained by the normal factor (growth in credit sales). In accrual accounting models:
When there's no residual in the regression, it means all accruals are explained by the normal factor, so total accruals equal the non-discretionary (normal) accruals, and abnormal accruals are zero.
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The only factor expected to give rise to normal accruals in a company's earnings is the growth in credit sales. If there is no residual when total accruals are regressed on the growth in credit sales, total accruals are most likely equal to:
A
zero.
B
the abnormal accruals.
C
the non-discretionary accruals.
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