Why is an increase in retained earnings decreased from net income to create CFF?
Also why is gain/loss of sale added or deducted from CFO?
Net Income either is paid out as a dividend or goes to increase Retained Earnings. Dividends are an outflow in CFF.
Under the INDIRECT method, in CFO we start with Net Income and then “adjust” it back to a cash basis by reversing all the “non-cash” items in it. These are primarily Depreciation/Amortization Expense, which is are non-cash charges. We also subtract gains (and add back losses), since they’re included in Net Income, but are non-cash.
With all due respect, we subtract gains and add losses not because they’re noncash, but because they’re nonoperating. They may very well be cash, but they belong to CFI, not CFO.