Last in/first out

This method, commonly referred to as LIFO, is based on the assumption that the most recent units purchased will be the first units sold. A “widget” is an imaginary item that could be just about any product. The advantage of last in, first out accounting, or LIFO, is that typically the last widgets purchased were purchased at the highest price and that by considering the highest priced items to be sold first, a business is able to reduce its short-term profit, and hence, taxes.

Suppose you purchase five widgets at $10 apiece on January 4 and five more widgets at $20 apiece on February 2. You then sell five widgets on February 20. The value of your inventory, using LIFO, would be $50, since the most recent widgets purchased, at a total value of $100 on February 2, were sold. You were left with the five widgets valued at $10 each.

Beginners Accounting Question, multiple choice!?

Donahue Company uses both special journals and a general journal as described in this chapter. On June 30, after all monthly postings had been completed, the Accounts Receivable control account in the general ledger had a debit balance of $320,000; the Accounts Payable control account had a credit balance of $77,000.

The July transactions recorded in the special journals are summarized below. No entries affecting accounts receivable and accounts payable were recorded in the general journal for July.

Sales Journal - Total sales - $161,400

Purchases Journal - Total purchases - $56,400

Cash Receipts Journal - Accounts receivable column total - $131,000

Cash Payments Journal - Accounts payable column total - $47,500

Questions:

1. What is the balance of the Accounts Receivable control account after the monthly postings on July 31?

2. What is the balance of the Accounts Payable control account after the monthly postings on July 31?

3. To what account(s) is the column total of $161,400 in the sales journal posted?

a. credit accounts receivable in the subsidiary ledger

b. not enough info is given to answer the question

c. posting is not required for this amount

d. credit sales and debit accounts receivable in the general ledger

4. To what account(s) is the accounts receivable column total of $131,000 in the cash receipts journal posted?

a. credit accounts receivable in the subsidiary ledger

b. posting is not required for this amount

c. credit cash in the general ledger

d. credit accounts receivable in the subsidiary ledger

e. not enough info is given to answer the question

11 months ago

The answers are as follows:

1. What is the balance of the Accounts Receivable control account after the monthly postings on July 31? $350,400.00 Debit

2. What is the balance of the Accounts Payable control account after the monthly postings on July 31? $85,900.00 Credit

3. To what account(s) is the column total of $161,400 in the sales journal posted?

The entry for total sales is:

Dr Accounts receivable

Cr Sales

However in actual practice, we don't post the totals, we post the individual sales invoices that make up the total. This gives us the most accurate posting against individual debtor accounts rather than just one lump sum total. In addition, in most accounting systems, when you post individual items into the subsidiary ledger, the total balances in the control account are automatically updated.

So my answer would be (c) because we don't post the total, we post the individual invoices that make up the total.

4. To what account(s) is the accounts receivable column total of $131,000 in the cash receipts journal posted?

Cash received from debtors is posted as: Dr Cash

Cr Accounts receivable

Again, the individual receipts from debtors should be offset against their individual balances.

So my answer for this would be (b) because we post the individual amounts that make up the total.

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