Selling an asset: gains, losses and the three statements
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
8 min read · updated October 14, 2026
Companies sell things that are not inventory all the time. A trucking company retires part of its fleet. A manufacturer closes a plant and sells the machines. A retailer sells a store it owns. Each time, the interviewer's favorite question follows: walk me through the three statements.
It is a great test because the answer has a trap in the middle of it. The cash comes in all at once, but it has to be split across two sections of the cash flow statement in a way that feels backwards until you see why.
Book value is the whole story
Start with what the asset is worth on the books. When a company buys equipment, it records it as PP&E at cost and then reduces it each year through depreciation. What is left is the book value, also called net book value or carrying value.
Our example: a machine that cost $100 and has been depreciated by $60 so far. Book value is $40.
Book value is not what the machine is worth in the market. It is just the cost that has not yet been expensed. So when the company sells it, the price will almost never equal $40, and the difference is the gain or loss:
Sell for more than $40 and you book a gain. Sell for less and you book a loss. Sell for exactly $40 and nothing hits the income statement at all.
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Frequently asked
- A company sells equipment with a book value of $40 for $50. Walk me through the three statements.
- At a 40% tax rate: the income statement shows a $10 gain, taxes rise $4 and net income rises $6. On the cash flow statement, start at net income up $6, subtract the $10 gain in operations because it is not operating cash, so operating cash flow is down $4, then show the full $50 of proceeds in investing. Cash is up $46. On the balance sheet, cash is up $46 and PP&E is down $40, so assets are up $6, and retained earnings is up $6.
- Why do you subtract the gain on the cash flow statement?
- Because the full sale proceeds are already shown in investing activities. The gain is part of those proceeds and it is also sitting inside net income. If you left it in operations as well, you would count that slice of cash twice. Subtracting it moves the whole cash effect of the sale into investing, where it belongs.
- What if the asset is sold for less than its book value?
- You book a loss. Sell the $40 asset for $30 and there is a $10 loss, net income falls $6 at a 40% tax rate, the $10 loss is added back in operations, and the $30 of proceeds go in investing. Cash is up $34, PP&E is down $40, assets are down $6 and retained earnings is down $6.
- Is a gain on sale included in EBITDA?
- Usually not. A gain or loss on selling an asset is non-recurring and not part of the company's core operations, so bankers strip it out of EBITDA and adjusted earnings. Leaving it in would value the company on a profit it cannot repeat.
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