SUDIP CHAKRABORTY
TREATMENT OF PROFIT/ LOSS ON THE SALE OF ASSETS OR INVESTMENTS
In order to understand the concept of profit/loss on sale of assets or investments, we need to explore the concept of investment activity in more detail.
Investing activities can include:
- Purchase of property plant, and equipment (PP&E), also known as Capital Expenditure
- Proceeds from the sale of PP&E
- Acquisitions of other businesses or companies
- Proceeds from the sale of other businesses (divestitures)
- Purchases of marketable securities (i.e., stocks, bonds, etc.)
- Proceeds from the sale of marketable securities
There are more items than just those listed above that can be included, and every company is different. The only sure way to know what’s included is to look at the balance sheet and analyze any differences between non-current assets over the two periods. Any changes in the values of these long-term assets (other than the impact of depreciation) mean there will be investing items to display on the cash flow statement.
Cash Flow from Investing Activities Example
Let’s look at an example using Amazon’s 2017 financial statements.
Amazon’s investing activities include:
- Outflow: purchase of PP&E including software and website development
- Outflow: purchase of marketable securities
- Outflow: acquisitions, net of cash acquired
- Inflow: proceeds from the sale of property and equipment
- Inflow: proceeds from the sale of marketable securities
Treatment - If the business sustains a loss from the sale of an asset, the amount so received from the sale appear in the cash flow statement & is added. The gain on the sale of assets is included in the net income, the gain is shown as a deduction from the net income reported in the operating activities section of the cash flow statement (under the indirect method).
