Note 2. Summary of Significant Accounting Policies

Fair Value of Financial Instruments

The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable, other liabilities and borrowings under the revolving credit agreement approximate fair value because of the short-term nature of these items. Of these financial instruments, the cash equivalents are classified as Level 1 as defined in the Financial Accounting Standards Board ASC 820 fair value hierarchy.

Merchandise Inventories

The Company values merchandise inventories at the lower of cost or market value. In determining market value, the Company makes judgments and estimates as to the market value of its products, based on factors such as historical results and current sales trends. The Company maintains an inventory reserve for loss or obsolescence which was $4,937 at March 31, 2015 and $3,242 at December 31, 2014. Any reasonably likely changes that may occur in the future related to the assumptions used in the reserve may require the Company to record charges for losses or obsolescence against its assets in the future.

Recognition of Net Sales

The Company recognizes net sales for products purchased at the time the customer takes possession of the merchandise. Service revenue, primarily installation revenue and freight charges for in-home delivery, is included in net sales and recognized when the service has been rendered. The Company reports sales exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, and net of an allowance for anticipated sales returns based on historical and current sales trends and experience. The sales returns allowance and related changes were not significant for the three month periods ended March 31, 2015 and 2014.

Cost of Sales

Cost of sales includes the cost of the product sold, cost of installation services, transportation costs from vendor to the Company’s distribution centers or store locations, any applicable finishing costs related to production of the Company’s proprietary brands, transportation costs from distribution centers to store locations, transportation costs for the delivery of products from store locations to customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including shrinkage, and costs to produce samples, reduced by vendor allowances. In the first quarter of 2015, cost of sales included approximately $1,800 incurred for the air quality testing program provided to the Company’s customers.

The Company offers a range of limited warranties from the durability of the finish on its prefinished products to its services provided. Warranty reserves are based primarily on claims experience, sales history and other considerations, including payments made to satisfy customers for claims not directly related to the warranty on the Company’s products. Warranty costs are recorded in cost of sales. The reserve was estimated using information through the date of the financial statements. This reserve, included in other current liabilities, was $2,377 at March 31, 2015 and $1,568 at December 31, 2014. Should the Company’s actual experience related to results of its indoor air quality testing program and subsequent follow-up with customers differ from these estimates, additional reserves for customer satisfaction costs may be recorded in the future.