Answer (A) is correct . To derive net income from net cash inflow from operating activities, various adjustments are necessary. The depreciation of $38,000 should be subtracted because it is a noncash item included in the determination of net income. The increase in net accounts receivable of $31,000 should be added because it signifies that sales revenue was greater than the cash collections from customers. The increase in accounts payable should be subtracted because it indicates that purchases were $48,000 greater than cash disbursements to suppliers. The second step of the transformation from cash paid to suppliers to cost of goods sold is to subtract the decrease in inventory. This change means that cost of goods sold was $27,000 greater than purchases. The $12,000 increase in interest payable should also be subtracted because it indicates that interest expense was greater than the cash paid to the lenders. Thus, the net adjustment to net cash inflow from operating activities is –?$94,000 (– $38,000 + $31,000 – $27,000 – $48,000 – $12,000). Net income is $29,000 ($123,000 net cash inflow – $94,000 net adjustment).
Answer (B) is incorrect because The increase in interest payable is not subtracted.
Answer (C) is incorrect because Depreciation and the increase in interest payable are not subtracted.
Answer (D) is incorrect because Depreciation, the increase in accounts payable, the decrease in inventory, and the increase in interest payable should be subtracted, and the increase in net accounts receivable should be added.
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Net income is