Companies invest in securities for a variety of reasons. When they have significant cash on their balance sheets, they often invest in securities to obtain a larger return than they’d get allowing cash to idle. Alternatively, companies may have sold assets or divisions and need a place to hold the funds until deployment elsewhere in the business. Whether invested for the short or long term, when companies sell these assets, they report the gain on sale of investments on their income statement as “other income.”
“Gain on sale” is the profit a company makes when it sells a valuable asset. “Gain on sale of investments” is the profit made on the sale of either marketable securities or passive investments in other companies. Passive investments include investments in the shares of other corporations and the debt of other issuers. Passive investments also include larger investment stakes, sometimes referred to as strategic investments, in other businesses. Companies often make these investments to influence another company’s behavior.
Income Statement – Operating Income
Accrual accounting recognizes “gain on the sale of investments” as income on a company’s income statement. Publicly traded companies follow GAAP, generally accepted accounting principles, and therefore typically separate operating income from non-operating income. Operating income is revenue and expenses tied to a company’s usual revenue-generating business activities. For example, a software company’s operating income includes revenue generated from selling software, implementation services and related and expenses tied to these activities. The gains from selling equipment and assets used in these activities are considered operating income.
Income Statement – Non-Operating Income
Non-operating income is income that relates to the ancillary activities a company engages in. Non-operating income includes interest expense, income generated from the sale of investments and interest income. On the income statement, most companies use the term “other income” to represent non-operating income. Other income appears on the income statement below net operating income. Some companies embed “gain on sale of investments” within “other income” while others that break out subcategories will include this gain on a separate line and in the “other income” total.
A company purchases $700,000 in shares of Ford. Eighteen months later it sells these shares for $750,000. The gain on the sale of these Ford shares is the $750,000 sales price less the $700,000 purchase price or $50,000. The company records this $50,000 as a gain on sale of investments on its income statement under “other income”.