Do Gains on Sales of Assets Show Up on the Cash Flow Statement?

Businesses sell assets for a variety of reasons. The asset may be outdated and no longer useful or it could be included as part of an overall upgrade. An asset may be sold to generate cash to purchase another asset or cover expansion costs. When a business sells an asset for more than its value on the balance sheet, it must book a gain on the sale of the asset. Gains on sales do show up on the cash flow statement.

When your company records a "gain on sale," it records the profit made by selling a a valuable long-term asset. Companies depreciate long-term assets, which are assets held for more than 12 months, to capture their useful life and acknowledge wear and tear. You calculate gain on sale by subtracting the net book value of the asset, as shown on the balance sheet -- original cost less any accumulated depreciation -- from its sales price less transaction costs.

The cash flow statement shows the impact of your company's sales and profit generating, or operating activities, on its cash. It also shows how your company's use or acquisition of assets, liabilities and equity impact cash. The documentation of these cash flows is how the cash flow statement connects the income statement to the balance sheet. The cash flow statement, although often overlooked by small-business owners, provides significant insights into your company's cash position and ability to generate its own cash from operations. A cash flow statement includes three sections: operating, investing and financing.

All asset purchases and sales are considered investments, and the activity surrounding these actions are considered investing activity. Therefore, you record asset sales in the investing section of the cash flow statement. However, you record the gain in the operating section. Specifically, in the investing section you retire the asset by recording the total amount of sale proceeds you received for the asset. The amount that exceeds the asset's net value gets subtracted out in the operating section because that section will have already reflected the gain in net income from the income statement.

Say your construction company owns a forklift. Your balance sheet shows an original value of $15,000 and accumulated depreciation of $10,000. Thus, the net book value for the forklift shown on your balance sheet is $5,000. You sell the forklift for $7,000. To record this transaction, you show proceeds from the sale of the forklift of $7,000 under investing activity. Under operating activity, you deduct gain on the sale of the forklift of $2,000, because the $2,000 from the gain on sale is already included in the net income shown at the top of the operating section. The net increase in cash from this transaction is $7,000.