Cyberproblem Solution

Financial Statements, Cash Flow, and Taxes - 3M Company

A manager's primary goal is to maximize the value of his or her firm's stock. The stock's value i
s calculated as the present value of the firm's future cash flow stream. A study of a firm's finan
cial statements provides clues to its past, present, and likely future performance. Managers must
understand financial statements because their actions have a direct impact on them. Managers a
nd investors alike need to know how to read and interpret financial statements.

Let's examine Minnesota Mining and Manufacturing (otherwise known as 3M) Company's financia
l statements as reported in its 2001 Annual Report, which can be found at http://www.corporate-
ir.net/ireye/ir_site.zhtml?ticker=MMM&script=950.

Did 3M have more or less cash as of December 31, 2001 than it did as of December 31, 2000?
How does this affect the firm's liquidity?

At the end of 2001, 3M had $616 million of cash on its books, compared to $302 million of cas
h the previous year. This is a signal of improved liquidity especially when coupled with the fact
that as cash increased by a factor of 2, inventory and accounts receivable actually declined. This
coupled with a decrease in current liabilities, 3M definitely looks more liquid.

What was 3M's method for valuing inventory in fiscal year 2001? Refer to the "notes to stateme
nts".

3M uses the first-in-first-out (FIFO) method of accounting for its inventories.

What is 3M's total common equity or net worth as of year-end 2001? Is this amount larger or s
maller than in 2000?
Total common equity in 2001 amounts to $6,086 million, down from $6,531 million the previous
year. This decline is not terribly distressing as the firm's retained earnings did increase slightly, a
nd appears largely to influenced by a decline in its treasury stock account.

Look at 3M's consolidated statement of income, which appears before its balance sheet in the a
nnual report. What was 3M's operating income in 2001? Did operating income increase in 2001
when compared against 2000?

Operating income in 2001 was $2,273 million, compared to $3,058 the previous year. This declin
e in operating income is due to slightly lower revenue, and slightly higher expenses. Therefore,
3M should be concerned with stimulated new sales, while cutting back on operating costs.

What was 3M's net income available to common stockholders for fiscal years 1999, 2000, and 2
001?

3M had net income of $1,430 million in 2001, $1,782 million in 2000, and $1,763 million in 1999.
Naturally, the company and its shareholders should be aware of the lack of real growth in net
income over this period.

What was 3M's reported "basic" and "diluted" earnings per share in 2000 and 2001? What is the
difference between basic and diluted earnings per share?

Basic EPS was $3.63 in 2001 and $4.50 in 2000. Diluted EPS was $3.58 in 2001 and $4.45 in 20
00. The difference between basic and diluted EPS is that diluted EPS takes into account the effe
ct of unexercised stock options and warrants.

Go to http://finance.yahoo.com and obtain a quote for the Minnesota Mining & Manufacturing (
ticker: MMM) and look at the company's "Profile". What does Yahoo!Finance report as 3M's Cas
h and Income available to common? How do these values compare to 3M's annual report value
s for Cash and Net Income?

According to Yahoo!Finance, 3M has cash of $665 million and net income available to common
shareholders of $1.69 billion. Both of these numbers exceed our earlier estimates taken from the
firm's annual reports.

Why might there be a discrepancy between 3M's annual report and Yahoo!Finance?

Notice that after Cash there is a (mrq) and after Income available to common there is a (ttm). "
mrq" refers to most recent quarter, meaning that is the amount of cash the company reported
as of the last quarter that has ended. "ttm" means trailing twelve months, which means that ign
oring calendar or fiscal years, that number represents performance over the last year. Since the
numbers are from Yahoo!Finance and the annual report are referring to different time periods, it
is understandable that we receive somewhat conflicting results.