3M Company’s Liquidity

1384 Words3 Pages

The liquidity position of a company can be evaluated using several ratios which evaluate short-term assets and liabilities and a firm’s ability to settle short-term debts (Gibson, 2011). These ratios can provide insight into a firm’s ability to repay its debts in the short term (Gibson, 2011). In turn they suggest a firm’s capacity for debt-satisfying capabilities into the future (Gibson, 2011). This paper will use financial statement data as cited in Gibson (2011) from 3M Company (3M) to better understand liquidity measures to evaluate a firm’s total liquidity position. The following paper will focus on various liquidity calculations, their meaning, and their interpretation relative to 3M. Finally, an overall view of 3M’s liquidity position will be evaluated. By analyzing a company using ratios, one can evaluate the effectiveness of its management and its strengths and weaknesses (Žager, Sačer, & Dečman, 2012). A firm’s receivables account constitutes amounts owed to the company by customers, employees, or the government (Gibson, 2011). The account typically increases as a result of normal business operations where a company offers products or services to customers on account (Gibson, 2011). A company’s days’ sales in receivables is one of two measurement tools used to evaluate a firm’s trade receivables liquidity (Gibson, 2011). It is considered to be a gauge of a company’s ability to collect funds in relation to the credit terms it offers its customers (Bujaki & Durocher, 2012; Gibson, 2011). Essentially it calculates the average age of a company’s receivables account at the end of the year (Bujaki & Durocher, 2012; Gibson, 2011). As shown in Exhibit 1, 3M’s receivables were 51.28 days old in 2007 and 47.38 days old ... ... middle of paper ... ...es are the result of actual improvements in processes and not the effects of changes in accounting methods, relaxing of credit terms, or other manipulation (Gibson, 2011). Any negative trends should be examined and adjustments made to prevent further deterioration of the company’s liquidity position. Works Cited Bujaki, M., & Durocher, S. (2012). Industry identification through ratio analysis. Accounting Perspectives, 11(4), 315-322. http://dx.doi.org/10.1111/1911-3838.12003 Gibson, C. H. (2011). Financial reporting & analysis: Using financial accounting information. (12th ed.). Mason, OH: South-Western Cengage Learning. Žager, K., Sačer, I., & Dečman, N. (2012). Financial ratios as an evaluation instrument of business quality in small and medium-sized enterprises. International Journal of Management Cases, 14(4), 373-385. Retrieved from http://www.ijmc.org

Open Document