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)
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.
Preparing for investment banking interviews?
The WSO investment banking interview course is designed by countless professionals with real world experience, tailored to people aspiring to break into the industry. This guide will help you learn how to answer these questions and many, many more.