Certified Management Accountant Practice Exam 2025 - Free CMA Practice Questions and Study Guide

Using a natural business year can impact the days' sales in receivables ratio by understating it. A natural business year is typically aligned with the business cycle, often ending when a company’s revenue generation naturally concludes, such as the end of a peak sales season. This timing can cause an uneven distribution of sales and receivables throughout the year.

When a company utilizes a natural business year, it is likely to experience fluctuations in sales during different periods. If year-end sales spike significantly due to seasonal factors, the accounts receivable at that point may appear relatively lower when compared to an overall yearly sales figure that has been inflated by these seasonal peaks. As a result, the calculation of days’ sales in receivables—computed by dividing accounts receivable by average daily sales—may not accurately reflect the true time it takes to collect receivables.

In essence, the calculation might present a lower number of days, indicating that the company is collecting its receivables faster than it actually is. This discrepancy arises because the ratio does not fully account for the peaks in sales, leading to an understatement of the time it takes to convert receivables into cash. Thus, the natural business year can distort the presentation of the days’ sales in