Gain on disposal

Selling an asset for more than its carrying amount produces a gain, and for less produces a loss. Neither is revenue, because selling equipment is not the business, so it typically appears in other income or another line outside operating profit.

The cash flow treatment is where candidates lose marks, and the logic is worth holding rather than memorising. The gain is inside net income, which is where the indirect method starts, but the cash it relates to arrived as an investing inflow. Leaving it in operating would count the same money twice, so the gain is subtracted in the operating section and the entire proceeds appear in investing.

Note the two amounts involved. The operating adjustment is the gain alone, while the investing inflow is the whole of the proceeds, including the part representing the carrying amount recovered. Splitting the proceeds between the two sections is the classic error.

A loss works in reverse and for the same reason. It reduced net income without any cash leaving, so it is added back in operating, and the proceeds actually received still appear in full within investing.

There is a valuation point attached. Recurring gains on disposal inside operating profit are a quality of earnings issue, because selling assets is not repeatable, which is why analysts strip them out before building a multiple.