{"id":21764,"date":"2020-01-08T18:35:52","date_gmt":"2020-01-08T23:35:52","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=21764"},"modified":"2024-08-01T19:15:42","modified_gmt":"2024-08-02T00:15:42","slug":"why-gains-and-losses-are-non-cash-charges","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/why-gains-and-losses-are-non-cash-charges\/","title":{"rendered":"Why Gains and Losses are Non-Cash Charges (11:20)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Why Gains and Losses are Non-Cash Charges<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/why-gains-and-losses-are-non-cash-charges\/#What_Gains_and_Losses_Are\">What Gains and Losses Are<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/why-gains-and-losses-are-non-cash-charges\/#Why_Gains_and_Losses_Are_Non-Cash_Adjustments_%E2%80%93_Method_1_Timing_Differences\">Why Gains and Losses Are Non-Cash Adjustments \u2013 Method #1 (Timing Differences)<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/why-gains-and-losses-are-non-cash-charges\/#Why_Gains_and_Losses_Are_Non-Cash_Adjustments_%E2%80%93_Method_2_Re-classifications\">Why Gains and Losses Are Non-Cash Adjustments \u2013 Method #2 (Re-classifications)<\/a><\/li><\/ul><\/nav><\/div>\n\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h2><span class=\"ez-toc-section\" id=\"What_Gains_and_Losses_Are\"><\/span>What Gains and Losses Are<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Put simply, you record a Gain or Loss when you sell an Asset for a price that\u2019s *different* from its Book Value.<\/p>\n<p>In other words, it\u2019s listed on the Balance Sheet as a $100 Asset, but you sell it for $80 or $120.<\/p>\n<p>You would have to record a Loss of $20 in the first case, or a Gain of $20 in the second case.<\/p>\n<p>Many companies will have a line item for Gains and Losses on the CFS, usually right below or near Depreciation &amp; Amortization.<\/p>\n<p>But why? Why do these items count as non-cash adjustments, given that the entire transaction \u2013 selling an Asset \u2013 takes place in cash?<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_Gains_and_Losses_Are_Non-Cash_Adjustments_%E2%80%93_Method_1_Timing_Differences\"><\/span>Why Gains and Losses Are Non-Cash Adjustments \u2013 Method #1 (Timing Differences)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Gains and Losses are non-cash adjustments because they correspond to long-term Assets purchased in PRIOR periods.<\/p>\n<p>In other words, if you sell a $100 asset for $80, you need to record a Loss of $20 on the Income Statement\u2026 but you are NOT literally losing $20 in cash in THIS period!<\/p>\n<p>It\u2019s only a cash loss relative to what you paid for the asset a long time ago.<\/p>\n<p>But the Income Statement and Cash Flow Statement show us ONLY what is happening in THIS year, so we count this as a non-cash adjustment.<\/p>\n<p>Net Income on the CFS will be lower as a result of this, so we add back the Loss (or subtract the Gain), and then show the Net Proceeds Received in Cash Flow from Investing.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>So\u2026 we add back the Loss of $20 in CFO, and then in CFI, we subtract out the $20 again, and also show the book value of $100 for the Assets we just sold, so that $80 shows up in CFI.<\/p>\n<p>The logic is very similar for Gains: if we sell a $100 Asset for $120, that doesn\u2019t count as a real $20 \u201ccash gain\u201d IN THIS period.<\/p>\n<p>It is a gain over what the company has spent previously, but all that matters is what\u2019s on the financial statements in this period.<\/p>\n<p>So you subtract the Gain in the CFO section, and then add the Gain and show the book value of the Assets sold in the CFI section, so $120 appears there.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_Gains_and_Losses_Are_Non-Cash_Adjustments_%E2%80%93_Method_2_Re-classifications\"><\/span>Why Gains and Losses Are Non-Cash Adjustments \u2013 Method #2 (Re-classifications)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Another way to think about this point is that you\u2019re really \u201cre-classifying\u201d Gains and Losses from Cash Flow from Operations into Cash Flow from Investing instead.<\/p>\n<p>Since they don\u2019t relate to a company\u2019s core business operations \u2013 but rather long-term investing activities \u2013 they belong in the CFI section instead.<\/p>\n<p>The Cash Flow Statement is often used to \u201cre-classify\u201d items into other sections; one good example is Excess Tax Benefits from Stock-Based Compensation, which are often subtracted out from Cash Flow from Operations and then put into Cash Flow from Financing.<\/p>\n<p>The same idea applies here, but it\u2019s with Gains and Losses on Asset Sales instead.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you\u2019ll learn why Gains and Losses on Asset Sales are considered non-cash charges and why you subtract them out or add them back within the Cash Flow from Operations section of the Cash Flow Statement \u2013 including two ways you can think about this point.<\/p>\n","protected":false},"featured_media":21771,"template":"","class_list":["post-21764","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/21764","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/21771"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=21764"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}