What is deducted from net income when preparing cash flow from operations using the indirect method?

When preparing the cash flow from operations using the indirect method, gains on sales are subtracted from net income. This is because net income includes all revenues and expenses, so when a gain on sale is recognized, it inflates net income compared to the actual cash flows from operations. The cash received from the sale is accounted for separately in the investing activities section of the cash flow statement, so the gain itself needs to be deducted to reflect the true cash flow generated by operations.

In contrast, depreciation expense is added back to net income because it is a non-cash charge that reduces net income but does not represent an outflow of cash during the period. Losses on sales would be added to net income since they reduce the net income but do not correspond to cash outflows, while increases in current liabilities are also added to net income as they indicate cash that has not yet left the company, contributing to cash flow.