Chapter 10
Purchases and Cash Payments in a Perpetual Inventory System
Chapter Overview
This chapter looks at a buyer’s view of a merchandise company and pays special attention to the way
transactions are recorded in a perpetual inventory system. In a perpetual inventory system, purchases of
merchandise inventory are recorded by debiting merchandise inventory and crediting accounts payable. The
purchaser records purchases at cost and uses merchandise inventory to record any returns or allowances for
damaged or unacceptable goods. A debit memorandum is issued by the buyer to inform the seller that the
Learning Objectives
After studying Chapter 10, your students should gain proficiency in the following:
2. Journalize, Record, and Post Cash Payments Transactions and Prepare a Schedule of Accounts Payable.
Chapter 10 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Discussion Questions and Critical Thinking/Ethical Case
1 F.O.B. 1 5 Easy
2 Merchandise Inventory 1 5 Easy
3 Cost of Goods Sold 1 5 Easy
8 Purchase Requisition & Purchase Order 1 5 Easy
9 Invoice 1 5 Easy
10 Merchandise Inventory & Equipment 1 5 Easy
11 Debit Memorandum 1 5 Easy
12 Trade Discount vs. Cash Discount 1 5 Easy
13 Cost of Goods Sold 1 5 Medium
14 Discounts 1 5 Easy
16 Ethical Case 1 10 Medium
Concept Checks
1 Journalizing Transactions 1, 2 10 Medium
Exercises (Set A)
10A-1 Record & Post Transactions 1 15 Easy
10A-2 Merchandise Return 1 15 Easy
10A-3 Purchase Discounts 2 20 Medium
10A-4 Schedule of Accounts Payable 2 10 Easy
10A-5 Purchase Merchandise 2 10 Easy
Exercises (Set B)
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
10B-1 Record & Post Transactions 2 15 Easy
Problems (Set A)
10A-1 Merchandising Transactions 1, 2 30 Medium
10A-2 Merchandising Transactions 1, 2 45 Medium
10A-3 Transactions, Schedule of A/P 1, 2 45 Medium
10A-4 Merchandising Transactions 1, 2 40 Hard
Problems (Set B)
10B-1 Merchandising Transactions 1, 2 30 Medium
Financial Report Problem
Reading Amazon’s Annual Report 1 15 Medium
Keeping It Real
Learning Unit 10-1: Journalizing and Recording Transactions to the
Accounts Payable Subsidiary Ledger and Posting to the General
Ledger Along with a Debit Memorandum Using the Perpetual
Inventory Method
Summary: If the seller is responsible for paying the shipping cost until the goods reach their destination,
the freight charges are F.O.B. destination (F.O.B. stands for “free on board” the freight carrier). If goods
A receiving report is a business form used to notify the appropriate people of the ordered goods received
along with the quantities and specific condition of the goods. The invoice approval form is used by the
accounting department in checking the invoice, including comparing the purchase invoice to the purchase
order, and finally approving purchase invoice for recording and payment.
Accounts payable is the controlling account in the general ledger. At the end of the month, the sum of the
Key Concepts: F.O.B. destination, F.O.B. shipping point, purchase requisition, purchase order, purchase
invoice, receiving report, invoice approval form, accounts payable subsidiary ledger, debit memorandum.
Lecture Outline:
1. Freight charges are a cost of purchasing inventory. Freight costs are recorded as a debit to merchandise
inventory.
2. The purchasing process:
a. Prepare a purchase requisition – a form used within a business by the requesting department
asking the purchasing department of the business to buy specific goods.
b. Purchasing Department prepares a purchase order – a form used in business to place an order
for the buying of goods from a seller. (See Figure 10.2)
individual supplier’s account in the accounts payable subsidiary ledger.
h. The accounts payable account balance in the general ledger is the controlling account, because
it has all of the individual supplier’s accounts payable balances included in its balance.
i. The individual creditors have their own account within the accounts payable subsidiary ledger.
(See Figure 10.6)
i. These accounts represent the amount the business owes to each creditor.
ii. The accounts are listed in alphabetical order.
j. A debit memorandum is a piece of paper issued by a customer to a seller indicating a return or
allowance has occurred. (See Figure 10.9)
Teaching Tips/Strategy: Use the Success Coach LU 10-2 to clarify the concepts of purchases, purchases
returns and other calculations involving merchandise inventory. Use discussion questions #1-#5 and #8-#11
to discuss critical terms related to merchandise inventory transactions. Demonstrate Exercise 10A-2 in
class, and assign Exercise 10A-2 to reinforce the concepts presented in the objectives.
Use the “Ten–Minute Quiz” questions #1-#8 and #10 to reinforce objective concepts.
Learning Unit 10-2: Cash Payments Transactions and Schedules of
Accounts Payable
Summary: All payments for purchases of cash (check) are recorded in the general journal. At the end of the
month, the schedule of accounts payable, a list of ending account balances owed to individual suppliers or
creditors, should equal the ending balance in accounts payable, the controlling account in the general
ledger.
Now let’s prove that the sum of the accounts payable subsidiary ledger at the end of the month is equal to
the controlling account, accounts payable, at the end of the month. To do so, creditors with an ending
Key Concepts: Controlling account
Lecture Outline:
1. Controlling account is the account in the general ledger that summarizes or controls a subsidiary
ledger. (Example: The accounts payable account in the general ledger is the controlling account for the
2. With cash payment transactions, cash will be credited. Any discount taken will also be credited while
other accounts will be debited. (See Figure 10.12 for examples of cash payments transactions.)
Teaching Tips/Strategy: Use the Success Coach LU 10-2 to clarify the concepts involving cash payments
transactions and schedules of accounts payable. Use discussion question #6 and #7 to discuss critical terms
related to accounts payable and schedules of accounts payable. Use the Concept Checks #2-#4 to practice,
and assign Exercises 10A-3,10A-4, and 10A-5 to reinforce the concepts presented in the objective.
Use the “Ten–Minute Quiz” question #9 to reinforce objective concepts.
Teaching Tips/Strategy: Each chapter contains a Try It! at the end of each Learning Unit. The Try its! are
Name Date Section
CHAPTER 10
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. If a business buys goods for $350 and later issues a debit memorandum for $25, the amount it owes
the seller is:
a. $325
b. $350
c. $375
d. $400
2. F.O.B. Shipping Point indicates:
a. The buyer is paying for freight, and the sale takes place when the goods are delivered.
b. The seller is paying for freight, and the sale takes place when the goods are shipped.
c. The buyer is paying for freight, and the sale takes place when the goods are shipped.
d. The seller is paying for freight, and the sale takes place when the goods are delivered.
3. F.O.B. Destination indicates:
a. The buyer is paying for freight, and the sale takes place when the goods are delivered.
b. The seller is paying for freight, and the sale takes place when the goods are shipped.
c. The buyer is paying for freight, and the sale takes place when the goods are shipped.
d. The seller is paying for freight, and the sale takes place when the goods are delivered.
4. A business form that indicates a departments’ request to purchase supplies is:
a. A purchase requisition
b. A purchase order
c. A receiving report
d. A check request
5. A business form that indicates a departments’ approval to purchase supplies is:
a. A purchase requisition
b. A purchase order
c. A receiving report
d. A check request
6. The account used to record the cost of freight by the purchaser on merchandise purchased is:
a. Merchandise inventory
b. Cost of goods sold
c. Freight-in
d. Freight-out
7. A company purchased goods but found they were defective and returned them. The company would
record the return as:
a. A purchase return
b. A purchase discount
c. A sales return
d. A sales discount
8. Purchase discounts are calculated based on:
a. Cost of purchase
b. Cost of purchase less any returns and allowances
c. Cost of purchases less returns and allowances plus freight-in
d. Cost of purchases less freight-in
9. When a business returns goods to the seller, they need to debit:
a. The merchandise inventory account
b. The subsidiary ledger for that supplier
c. Accounts payable and the subsidiary ledger for that supplier
d. The merchandise inventory account and the accounts payable account.
10. Gross profit is calculated by:
a. Revenue less operating income
b. Operating income less cost of goods sold
c. Cost of goods sold less freight-in
d. Revenue less cost of goods sold
Answer Key to Chapter 10 Quiz