Use the Following Information for Questions

question 2

Multiple Choice

Use the following information for questions.
Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 and no corrections have been made for any of the errors. Ignore income tax considerations.
-A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was also omitted from the year-end physical count. How will these errors affect assets, liabilities, and shareholders' equity at year end and net income for the year? Assets Liabilities Shareholders' Equity Net Income

• A) no effect understate overstate overstate
• B) no effect overstate understate understate
• C) understate understate no effect no effect
• D) understate no effect understate understate

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Definitions:

Target Capital Structure

Target capital structure is the proportional combination of debt, equity, and other financing sources a company aims to maintain.

Discounted Cash Flow

A valuation method used to estimate the value of an investment based on its expected future cash flows.

Cost of Equity

The return that investors expect for investing in a company's equity, reflecting the risk compared to the risk-free rate of return.

Beta

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio compared to the market as a whole.