Gain/Loss on Sale of Asset

Say you sell an asset for $100 that had a book value of $80, how would that affect the 3 statements? (40% tax rate)

Thanks

Gain on the Sale of an Asset Affect to the Financial Statements

Overall, the impact can be summarized by the below picture which we will explain further below.

Sale Impact on the Income Statement

On the income statement, the gain (or loss) is recorded in the one time expense / revenue section and then adjusted for the effect of tax. Here since the asset was on the books for $80 and sold for $100 dollars there was a $20 gain on the asset. Then after subtracting out taxes (assuming a 40% tax rate) net income should be up by $12.

Statement of Cash Flows Asset Sale Affect

On the cash flow statement, net income (+$12) flows onto the top of the statement of cash flows. Then you need to subtract out the impact of the gain since it is a non-cash benefit (-$20). Then you need to add back the entire sale of the asset (+$100). The net change in cash is $92.

Sale of an Asset Impact on Balance Sheet

Finally, on the balance sheet - cash is up $92 from the balance sheet. The PP&E that was sold needs to be written off the books (-$80). Overall, the assets side of the balance sheet is up $12. The liabilities and equity side of the balance sheet is up by $12 as net income flows into the retained earnings on the equity side of the balance sheet.

This process would be exactly the same for an asset sale that resulted in a loss.

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Comments (24)

Sep 20, 2010 - 12:09am

Assuming cash purchase, cash taxes

Income statement
Income from investments up by $20
Tax up by $8
Net income up by $12

Balance sheet
Assets down by $80
Cash up by $92
Retained earnings up by $12

Cash flows
Cash flow from investments up by $92

Sep 20, 2010 - 12:43am
drexelalum11:
Assuming cash purchase, cash taxes

Income statement
Income from investments up by $20
Tax up by $8
Net income up by $12

Balance sheet
Assets down by $80
Cash up by $92
Retained earnings up by $12

Cash flows
Cash flow from investments up by $92

This is what I was thinking. So is the $92 that cash is up just $12 from increase in Net Income + $80 from selling asset?

Thanks for your help.

Sep 20, 2010 - 12:58am
Shaniqua:
drexelalum11:
Assuming cash purchase, cash taxes

Income statement
Income from investments up by $20
Tax up by $8
Net income up by $12

Balance sheet
Assets down by $80
Cash up by $92
Retained earnings up by $12

Cash flows
Cash flow from investments up by $92

This is what I was thinking. So is the $92 that cash is up just $12 from increase in Net Income + $80 from selling asset?

Thanks for your help.

No, it's $100 from selling the asset less $8 in taxes, which is effectively the same thing.

Sep 20, 2010 - 12:09am

I/S:

$20 gain on the asset. EBIT is $20 higher.
20 * .4 = 8
Taxes are $8 higher. Net income is $20 - $8 = $12 higher.

Balance sheet:

Cash up by $100
PPE down by $80
Taxes payable up by $8
Equity up by $12

Cash flow:

Decrease in PPE added back to operating cash flows: $80 - (perhaps wrong about where this exactly goes, but regardless, the change in the book value of the asset drives the impact to the cash flow statement)
Gain on sale of asset (cash flows from investing): $20

Sep 20, 2010 - 12:13am

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Sep 20, 2010 - 8:11am
jhoratio:
But you haven't paid the taxes yet, so on a cash basis it's $100. The $8 in taxes is only a liability at this point.

I gave the statements at the end of the period and assumed the taxes were paid in cash, at which point the liability is irrelevant and the cash effect has gone through (assuming zero NOLs, etc).

Sep 20, 2010 - 2:32am

So is the $92 that cash is up just $12 from increase in Net Income + $80 from selling asset?

Sep 20, 2010 - 11:34pm
lbs:
So is the $92 that cash is up just $12 from increase in Net Income + $80 from selling asset?

Any gain (loss) on sale of asset has to be deducted (added) to net income on the CFS to get to CFO. In this scenario,

Net Income +12
Gain on sale of asset -12
Cash taxes paid -8
Proceeds from sale of asset +100
Net change in cash +92

Jul 16, 2013 - 6:21pm

Uryd Lebaux:

lbs:

So is the $92 that cash is up just $12 from increase in Net Income + $80 from selling asset?

Any gain (loss) on sale of asset has to be deducted (added) to net income on the CFS to get to CFO. In this scenario,

Net Income +12

Gain on sale of asset -12

Cash taxes paid -8

Proceeds from sale of asset +100

Net change in cash +92

This is the right answer

When in doubt...Dick Pick
Sep 20, 2010 - 11:43am
jhoratio:
Call me the next time you or anyone you know pays taxes in cash when incurred. Casinos don't count.

I wasn't, I was giving the change in statements at year-end. It's an example. Your answer would be correct if you were giving the change at point of sale.

Apr 24, 2013 - 7:32pm

jhoratio:
Even year end the taxes aren't paid yet

Technically you must make estimated tax payments at the end of every quarter on income that does not have taxes withheld. But at the very least you accrue the tax expense and setup a tax payable account.

Jul 16, 2013 - 10:50pm

move.over.chuck.norris:

Uryd Lebaux:
lbs:

So is the $92 that cash is up just $12 from increase in Net Income + $80 from selling asset?

Any gain (loss) on sale of asset has to be deducted (added) to net income on the CFS to get to CFO. In this scenario,

Net Income +12

Gain on sale of asset -12

Cash taxes paid -8

Proceeds from sale of asset +100

Net change in cash +92

This is the right answer

Yea, we really needed someone to come out and let us know four months after the fact.

Best Response
Nov 27, 2015 - 3:04pm
  • I/S:
    -Gain reported as addition to net income in income statement- Net income $20 higher
    -Taxes are $20*0.4 higher
    -Thus overall Net income is $20 - $8 = $12 higher
  • Statement of cash flows:
    -Net income flows into cash from operating activities, gain is then subtracted out
    -Operating section of net income up by $12 and then $20 gain is subtracted out- cash flow from operations decreases by $8
    -Entire proceeds received from sale are a source of cash in cash from investing section on statement of cash flows, increases by $100
    -Ending cash balance increases by $92
  • B/S:
    -Left: Cash increases by $92, Assets decreases by $80
    -Retained earnings increases by $12
Nov 20, 2015 - 3:01pm

the prior post is the best explanation because it accounts for the fact that we add back the gains from asset sale in the CFO section, and then account for the whole thing in the CFI section. But he meant to write CFO decreases by $8 rather than $18, simple typo

Dec 25, 2016 - 5:17am

It's a recategorization. It's not an operational item (part of the business's core profitability)

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