Final answer:
Adjustments for gains and losses on fixed assets in the statement of cash flows using the indirect method are necessary to reflect the true cash flow from operating activities. Gains are subtracted from, while losses are added back to net income, as they do not affect cash flow from operations.
Step-by-step explanation:
The student's question relates to the indirect method of preparing the operating activity section of the statement of cash flows and specifically asks about gains and losses on fixed assets. In the indirect method, net income is adjusted by the changes in non-cash accounts to calculate cash provided by operations. Gains and losses from the sale of fixed assets are adjustments to this calculation because they are non-operating items that are included in net income but do not affect cash flow from operations.
For example, if there is a gain on the sale of an asset, it is subtracted from net income because the gain increased net income but did not involve an actual cash transaction related to operating activities. Conversely, a loss on the sale would be added back to net income. It is essential to recognize that these adjustments are necessary to accurately reflect the cash flow from operating activities without the distortion of investment and financing transactions.