Ingersoll-Rand manufactures specialized heavy-duty construction equipment. Included in a set of recent financial statements is the account “customers’ advance payments, “ with a balance of over $15 million. The notes to the financial statements indicate that, although payments are collected in advance from customers, revenues are recognized then products are shipped. Products are normally shipped within six months of the advance payments.
REQUIRED:
a. On what financial statement and in which section of that statement would the account “customers, advance payments” be found?
b. Explain the accounting treatment associated with this account in terms of the principles of revenue recognition and matching.
c. Under this accounting treatment, how are important financial ratios, such as earnings per share, the current ratio, and the debt/equity ratio, affected (1) when the advance payments are received and (2) when the related goods are shipped?