When a firm redeems a bond early, it will gain if the carrying value is more than the redemption price - i.e they paid less to reaquire the bond than what they initially received for it.
It’s stated that if they gain from this, the gain is subtracted from net income in calculating cash flow from operations. I don’t get why it’s a subtraction. Any ideas why?
Pg 263 of the Schweser Book 3.
Hi, I don’t have access to the Schweser book which you quote, but the reasoning is:
eliminate the gain from net income as when computing CFO (bond repayments are nothing to do with cash flows from operating activities plus you are not really interested in the accounting gain or loss on the transaction but the actual cash flow).
show the actual cash outflow required for the redemption as part of CFF (this is where it belongs and we want the complete cash outflow not the gain/loss).
This is very similar to what you would do in respect of a gain or loss on the disposal of a long-lived asset. Eliminate the gain or loss as part of CFO and include the actual cash proceeds from the sale as part of CFI.
regards
Ahhhh… I think I get what you mean.
So just to state my understanding, it’s because the gain/loss is included in net income but the gain/loss does not generate/reduce cash that you want to remove it from Net Income for CFO?
Thanks for this, Wojtek 
yes, confirmed 
remove it from Net income in the CFO section and include the actual cash outflow (in the case of a debt repurchase) in the relevant section, in this case CFF.
Take care!