1. Components of working capital Take a look at Figure 30.1. Why do food stores hold large inventories? Why do railroads hold small inventories? Why do you think that pharmaceutical companies hold so much cash and securities? Answer briefly.
2. Components of working capital* True or false?
a. Companies with negative net working capital are usually in financial trouble.
b. Principal payments on long-term debt are shown as current liabilities if due within the next 12 months.
c. Accounts payable are usually a small fraction of the firm’s total liabilities.
d. Accounts receivable are usually the largest category of current assets.
e. Less profitable companies typically hold larger cash balances as a precautionary measure.
f. Well-managed companies invest the majority of their excess cash in short-term securities. They avoid the risks of investing in long-term bonds.