The Financial Statements of Franklin Company Contained the Following Errors

question 59

Essay

The financial statements of Franklin Company contained the following errors: $\begin{array}{lll}\text { Item } & \text { December 31.2013 } & \text { December 31.2014 } \\\begin{array}{l}\text { Depreciation expense on office } \\\text { equipment }\end{array} & \$ 1,000 \text { understated } & \$ 900 \text { overstated }\end{array}$ Required:
A. Was net income for 2013 understated or overstated? Briefly explain your answer.
B. 1. Considering the effect of the errors of both years at December 31, 2014, is retained earnings overstated or understated, and by what amount?
2. Briefly explain your answer to part B(1).

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Definitions:

Testing Hypotheses

The process of carrying out experiments or observations to determine whether the initial assumptions (hypotheses) are supported or refuted.

Scientific Method

A systematic approach to research and experimentation characterized by observation, hypothesis formulation, experimentation, and conclusions.

Observing Some Phenomenon

The act of carefully watching, tracking, or analyzing an occurrence, event, or thing to gather data and draw conclusions.

Scientific Method

A systematic and logical approach to discovering how things in the universe work, involving observation, hypothesis formulation, experimentation, and conclusion.