Depreciation expense is a non-cash transaction that increases expenses on the income statement. Since it increases expenses, it decreases net income. Since it is a non-cash transaction, its effect on net income needs to be removed in order to calculate net cash flows from operating activities. To remove its effect on net income, we add it back to net income. We do not deduct it from net income.
Under the indirect method, increases in operating asset accounts and decreases in operating liability accounts are deducted from net income. This is the increase in a liability which would be added to net income.
Under the indirect method, increases in operating asset accounts and decreases in operating liability accounts and gains from investing and financing activities are deducted from net income. The amortization of bond premium is in essence the amortization of a gain. It decreases interest expense on the income statement, even though it is a non-cash transaction. Since it decreases interest expense, it increases net income, so it should be deducted from net income in the preparation of the operating section of the statement of cash flows, because it does not represent any cash received.
The question asks, "which one of the following should be deducted from net income when determining net cash flows from operating activities?" A loss on the sale of plant assets decreases net income and thus should be added to net income, not deducted, to remove it from net income when calculating net cash flows from operating activities using the indirect method.
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