FNCE 3001 Week 4 Cash Flow Reconciliation Note Example

Why Juniper Peak Sports Earned $4.7 Million but Its Operations Produced $4.4 Million in Cash: A Note Reconciling Fiscal 2025 Net Income to Operating Cash Flow, Adjustment by Adjustment

Student Name

Walden University

FNCE 3001: Financial Management

Instructor Name

Month Day, Year

Why Juniper Peak Sports Earned $4.7 Million but Its Operations Produced $4.4 Million in Cash: A Note Reconciling Fiscal 2025 Net Income to Operating Cash Flow, Adjustment by Adjustment

The Two Figures

In fiscal 2025, Juniper Peak Sports, the composite retailer analyzed in earlier weeks, reported net income of $4,680 thousand. Its statement of cash flows reports net cash provided by operating activities of $4,380 thousand. Operations produced $300 thousand less cash than profit. That gap is small, but the items inside it are not: some added more than $2 million to cash and one took away almost $3 million. This note explains each adjustment as an event that either moved money or did not. All figures are in thousands of dollars and come from the fiscal 2025 statement of cash flows, prepared using the indirect method.

The Reconciliation

Table 1

How Net Income Became Operating Cash Flow in Fiscal 2025 (in thousands)

Composite company. Parentheses denote reductions in cash.

Depreciation and Amortization

The add-back for depreciation reverses a deduction that took no money out of the company in fiscal 2025. The cash left when the store fixtures and equipment were bought in earlier years; depreciation spreads that cost over their useful lives. It is tempting to say depreciation "provides" $2.1 million of cash. It does not. It is added back only to undo a non-cash deduction, and if the company stopped depreciating its assets, its cash would not rise by a dollar, apart from a tax effect (Brigham & Houston, 2022).

Working Capital Changes

Accounts receivable rose by $400 thousand, from $1,900 to $2,300 thousand. Sales to schools and clubs on invoice were recorded as revenue, but the customers had not yet paid by year end, so that portion of profit had not yet arrived as cash.

Inventory rose by $2,800 thousand, from $15,800 to $18,600 thousand. This is the largest item in the note. The company paid suppliers for goods it had not yet sold, mostly ski equipment and winter clothing carried into the spring. Cost of goods sold records only the goods that were sold, so the extra stock cost cash without touching profit.

Prepaid expenses rose by $50 thousand, mainly insurance paid in advance. The cash left this year; the expense will be recorded next year.

Accounts payable rose by $700 thousand. Juniper Peak received goods from suppliers and had not yet paid for all of them at year end. Owing suppliers more is, for now, a source of cash, because the payment has been deferred.

Accrued liabilities rose by $150 thousand, mostly wages and sales tax recorded as owed but not yet paid. Again, the expense reduced profit, but the cash had not yet left.

What the Pattern Shows

The pattern is clear. Profit was turned into cash at a reasonable rate, except for one item: inventory. Without the inventory build, operating cash flow would have been about $7.2 million, well above net income. Suppliers financed $700 thousand of the build through larger payables, and the company's own cash covered the rest. Ross et al. (2022) note that growing firms often show operating cash flow below profit because they invest in working capital; the question is whether the investment will turn into sales. Sloan (1996) found that earnings made up largely of accruals, rather than cash, tend to be less persistent, which is one reason analysts watch this gap. Here, the notes suggest much of the extra inventory is winter stock that missed its season.

What It Means for the Next Quarter

The company enters the spring with $3.2 million in cash. Its payroll, rent and other operating costs in the slow months run about $2.0 million a month, offset by spring sales. If the extra ski stock cannot be sold until next winter, about $2.8 million of the company's cash is tied up for most of a year. That is not a crisis, given the company's undrawn credit line, but it means Juniper Peak has less room than its net income suggests. The practical figure for management is this: every $1 million of the excess inventory that is cleared at cost before June would raise spring cash by about a third.

References

Brigham, E. F., & Houston, J. F. (2022). Fundamentals of financial management (16th ed.). Cengage Learning.

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2022). Fundamentals of corporate finance (13th ed.). McGraw Hill.

Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289-315.