Capex and Asset Sales on the Three Statements

Introduction

Macy's collected $283 million from selling assets in its fiscal year ended February 2025 and recorded $144 million of gains on real estate sales, mostly of store locations it no longer planned to operate. US GAAP puts gains on selling assets a company used in its business inside operating income, so the gains flattered a year in which the core business was under pressure. The cash, meanwhile, appeared in a different place entirely: the investing section of the cash flow statement, while the operating section subtracted the gains back out.

Buying and selling long-lived assets is the clearest example of how the three statements separate profit from cash. A purchase is not an expense, so it bypasses the income statement and lands in investing activities. A sale produces a gain or loss that the income statement reports, but the cash it generates belongs to investing, so the cash flow statement has to move it. Tracing both with the method from tracing a transaction through the statements shows each step, including the reclassification that most often goes wrong.

When a company buys equipment, a building or capitalized software that will benefit several years, it records an asset rather than an expense. Which costs qualify is a judgment governed by the rules covered in capitalizing vs expensing costs. Suppose a company buys a machine for $200 in cash:

Nothing happens on the income statement. Cash falls by $200 in investing activities, and PP&E rises by $200: an asset swap with no change in total assets. The cost reaches the income statement only gradually, as depreciation over the machine's useful life, which reduces net income each year, is added back on the cash flow statement and reduces net PP&E, the pattern traced in depreciation on the three statements. Over the machine's life, total depreciation equals the $200 paid, less any salvage value, and the tax deductions on that depreciation return part of the cost in cash.

Capital expenditure (capex)

Cash spent to acquire or improve long-lived assets such as property, plant, equipment and capitalized software. It is recorded as an asset and reported in investing activities, and reaches the income statement only through depreciation or amortization over the asset's life.

Capex That Has Not Been Paid

If the machine is delivered before year end but paid for after, the company records the asset and a liability, usually within accounts payable or accrued liabilities. Nothing appears on the cash flow statement until the payment, and the unpaid amount is disclosed as a non-cash investing activity. The balance sheet shows PP&E and liabilities both up $200, and the capex line in the following year's investing section includes the payment. During a large building program the gap between capex incurred and capex paid can be significant, which is why the roll-forward of PP&E rarely ties to the investing section alone, as shown in PP&E and debt roll-forwards.

When an asset is sold, the income statement records a gain or loss equal to the proceeds less the asset's net book value, its cost less accumulated depreciation and impairments. The cash flow statement then removes that gain or loss from operating activities and shows the full proceeds in investing activities, so the cash is counted once and in the right section.

A gain at $120 of proceeds on an asset carried at $80 was traced in the method article: net income rises $30 after tax, operating cash flow falls by the $10 of tax on the gain, and investing shows $120. A loss works the opposite way. Suppose a company sells equipment with a net book value of $100 for $60, recording a $40 loss, deductible at 25%:

Net income falls by $30. On the cash flow statement, the $40 loss is added back in operating activities because it used no cash, leaving the $10 tax saving as the operating effect, and the $60 of proceeds appears in investing activities. Cash rises by $70 in total. On the balance sheet, cash rises $70 and PP&E falls $100, a net fall of $30 in assets matched by retained earnings.

Assets Held for Sale

Before a sale completes, an asset may be reclassified. When management commits to a plan, the asset is available for immediate sale, a buyer is actively sought at a reasonable price and the sale is probable within a year, US GAAP requires it to be classified as held for sale. Deloitte's guide to measuring assets held for sale explains that the asset is then measured at the lower of its carrying amount and fair value less costs to sell, with any write-down recognized as a loss, and depreciation stops. On the statements, the reclassification itself moves the asset from PP&E to a held-for-sale line with no cash or income effect, unless a write-down is needed; the eventual sale then traces exactly as above. If the asset is a whole business whose disposal represents a strategic shift with a major effect on results, its results also move to discontinued operations.

Held for sale

A classification for a long-lived asset or disposal group that management has committed to sell, that is available for immediate sale, is being actively marketed and whose sale is probable within a year. It is measured at the lower of carrying amount and fair value less costs to sell, and is no longer depreciated.

Gain, Loss or Write-Off at a Glance

For an asset with a net book value of $100 and a 25% tax rate, with any gain taxed and any loss deducted in the same year, the three outcomes compare as follows:

In every row, the total change in cash equals the proceeds, less tax on a gain or plus the tax saved on a loss, and PP&E falls by the same $100. Only the split between the sections and the size of the income statement effect change, which is why an analyst who reads only operating cash flow can mistake the tax on a large disposal for weakness in the business.

Macy's fiscal 2025 annual report shows the reclassification at work across two years of real estate sales:

In fiscal 2024, the $144 million gain was about 16% of Macy's operating income of $909 million. The cash flow statement subtracted it from operating activities and reported $283 million of proceeds in investing, implying, if nearly all the proceeds came from those real estate sales, that the assets sold were carried at roughly $140 million. Macy's describes the gains as reflecting the monetization of store locations outside its go-forward fleet, a program that produces gains for as long as the company has suitable property to sell, but not indefinitely. In both years, proceeds covered only a fraction of capital spending, which combined purchases of property with capitalized software, a large category for a retailer investing in digital sales.

The investing section and the gains line together answer several questions. Is the company reinvesting enough? Comparing capex with depreciation gives a first indication: spending persistently below depreciation suggests the asset base is shrinking or ageing. Are asset sales funding the business? Proceeds that regularly cover a large share of capex or dividends signal a company harvesting its assets. And how much of operating income comes from gains? Recurring gains on sale, as at a retailer selling stores or an equipment lessor selling used fleet, may be part of the business model, but they should be separated from operating results before applying a multiple, as discussed in one-time items.

Real estate sales can also take the form of a sale and leaseback, where the company sells a property and continues to occupy it under a lease, which adds a lease liability and future rent to the trace; that structure is covered in sale-leaseback accounting. In every version, the core logic is the same: buying an asset moves cash into PP&E, depreciation moves PP&E into expense, and selling it converts what remains back into cash, with the gain or loss measuring how far the book value had drifted from what the asset was worth.