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Suppose the following financial data were reported by 3M Company for 2021 and 2022 (dollars in millions).

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Suppose the following financial data were reported by 3M Company for 2021 and 2022 (dollars in millions).

a. Calculate the current ratio and working capital for 3M for 2021 and 2022.

b. Suppose that at the end of 2022, 3M management used $200 million cash to pay off $200 million of accounts payable. How would its current ratio and working capital have changed?

Transcribed Image Text:

3M Company Balance Sheets (partial) 2022 Current assets Cash and cash equivalents Accounts receivable, net Inventories Other current assets Total current assets Current liabilities $ 3,040 3,250 2,639 1,866 $10,795 $ 4,897 2021 $1,849 3,195 3,013 1,541 $9,598 $5,839

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The current ratio is a financial ratio that measures a company\'s ability to pay its short-term obligations with its short-term assets. It is calculated by dividing a company\'s current assets by its current liabilities. The formula for calculating the current ratio is: Current Ratio = Current Assets / Current Liabilities Current assets are assets that can be converted to cash within one year, while current liabilities are debts that are due within one year. A current ratio of 1:1 or greater is generally considered good, as it indicates that a company has enough current assets to cover its current liabilities. A current ratio of less than 1:1 may suggest that a company may have difficulty meeting its short-term obligations. It\'s important to note that the current ratio is just one of many financial ratios that can be used to assess a company\'s financial health. It should be used in conjunction with other financial ratios and qualitative factors to make informed decisions about investing or lending to a company.

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