West Point Supply, Inc.

It is the second week of January $2018.$ The Chief Executive Officer $($CEO$)$ of West Point

Supply, Inc. $($WPS$),$ Mr$.$ Donnie Glover, is preparing for a meeting with the company's bank,

Welles Forgo Bank & Trust $($Welles Forgo$).$ To prepare for the meeting, Mr$.$ Glover is

reviewing the company's $2017$ financial statements. He is working with the knowledge that

$2017$ was a very good year for WPS both in sales and in profits, and he is hopeful the company's

bank will recognize this achievement. Such an outcome is important because in early $2017$ WPS

had arranged a term loan, for the first time ever, and its initial repayment installment of $$40,000$

is due on February $1,2018.$ Mr$.$ Glover hopes that the company's strong results during $2017$ will

impress Ms$.$ Carrie Lowe, the bank's loan officer. He is confident that the approaching loan

payment is within WPS$\text{'}$s financial capacity following its best year ever. He expects to send Ms$.$

Lowe the company's $2017$ financial statements soon so that she can review them before the due

date of the loan.

The Company

WPS was organized by Mr$.$ Glover in $2001$ as a wholesaler of electrical supplies and

equipment to building contractors in and around Pittsburgh, PA$.$ After a contraction during the

recession of $2007-2009$ its sales had grown through the following $10$ years. The company has

built a reputation for rapid delivery on a wide array of materials required by builders, many of

whom are not well$-$capitalized and cannot finance an extensive inventory themselves. Mr$.$

Glover believes WPS$\text{'}$s competitive advantage depends on this reputation. An implication of this

strategy is that WPS must carry substantial inventory. As a result, through time, the company

had to rent warehouse space in growing capacity.

To stock its inventory WPS purchases supplies from an array of dealers. WPS$\text{'}$s

suppliers sell to WPS on credit terms of $\frac{2}{15},$ net $30$ days. All of WPS$\text{'}$s purchases are on credit.

In turn, the company sells to builders on credit terms of net $30$ days and all sales are credit sales.

During the latter part of $2016,$ a decision was made to construct a new warehouse

adjacent to the company's main offices and existing storerooms. The new building meant that

WPS no longer needed to rent warehouse space $--$ which represents a saving for the company.

The Loan

When the financial statements for the year $2016$ were completed, Mr$.$ Glover had visited

Welles Forgo to secure a loan. Historically, WPS maintained operating cash balances with the

bank ranging from $$20,000$ to $$60,000.{?}^1$ Never before, however, had the company sought a loan

either for seasonal or longer$-$term capital requirements. Mr$.$ Glover discussed with Ms$.$ Lowe the

possibilities for bank support of WPS$\text{'}$s building expansion. He presented to her the $2016$

statements, together with a forecast for $2017$ which included the anticipated expenditures for

construction, and savings on warehouse rental fees $($see Exhibits $1$ and $2).$

${?}^1$ The numbers in this case may appear to be "too small" to be realistic or worth worrying about. If so$,$ just add three

zeroes to all numbers. The concepts employed will be the same regardless of the dollars involved.Based on these financial statements, on her conversations with Mr$.$ Glover, and on her

general knowledge of the building and building$-$supply business, Ms$.$ Lowe and the bank agreed

to loan $$120,000$ to WPS to help finance the proposed new facilities and the customary seasonal

increase in sales that occurs during the spring and summer of each year. The loan was structured

as a three$-$year loan, with repayments of principal of $$40,000$ due on February $1$ of $2018,2019,$

and $2020.$ The loan carries an interest rate of $12$ percent per year.

Mr$.$ Glover visited Ms$.$ Lowe periodically throughout $2017$ to update the bank on the

company's progress. The new warehouse was completed in May of $2017$ and Ms$.$ Lowe

participated in the "grand opening" ceremonies. She had been informed in October of $2017$ that

an especially good sales record was expected for the full year.

$*,**,**,**,**$Exhibit $1$

West Point Supply, Inc.

Balance Sheets as of December $31$

ASSETS

Cash

Accounts Receivable

Inventory ${?}^a$

Current Assets

Gross fixed assets

Less: Accumulated depreciation

Net fixed assets

Total Assets

LIABILITIES

Accounts payable

Miscellaneous accrued liability

Accrued income tax due ${?}^c$

Current Liabilities

Capital stock $($par $$50)$

Retained earnings

Total Liabilities & Owners Equity

$($before bank loan$)$

Funds needed $($Bank loan$)$

Total Liabilities & Owners Equity

$($after bank loan$)$

$$598,100,$$$653,000,$$$849,300$

$$681,000,$$$969,300$

a Inventory accounted for on a FIFO basis.

b After plann