I have been studying MJ companies and I am having a hard time figuring out the relationship between biological assets and CFO - cash flow from operations.
So my theory is: FV adjustments to inventories when biological assets are harvested could potentially understate CFO.
I’ll detail out a scenario and need a second set of eyes to determine if my accounting is correct or not.
Example (numbers are completely theoretical):
An MJ company invests $1000 into a MJ plants (including capitalized cost) which are considered a Biological Assets - Cash outflow is $1000.
4 months later the MJ is harvested, say 1000g at $5/g = $5000 of MJ, assume $0 harvesting cost (no capitalization). My understanding is when biological assets are harvest they enter inventory at FV less cost to sell. In this case,
DR Inventory $5000
CR Biological Asset $1000
CR FV gain on harvest $4000
Assume that no inventory is sold at year end.
FV gain on harvest $4000
Flowing into Cash flow statement
Less: FV gain ($4000)
Less: Increase in inventory ($5000)
CFO = ($5000)
CFI = ($1000)
So, in this case, even though my initial cash outflow was $1000, I’m recording a operational cash outflow of ($5000) simply because of the FV increase in the MJ I harvested.
Can someone reconcile this for me because ultimately the cash in the bank must match the cash in the books? If this is not right, where is the additional cash outflow coming from with respect to ($5000) in inventory?