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KAST CONSTRUCTION COMPANY LLC AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended December 31, 2013 and 2012 NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Fair Value of Financial Instruments The company's financial instruments are cash, contracts receivable, notes receivable, and accounts payable. The recorded values of cash, contracts receivable, notes receivable and accounts payable approximate their fair values based on their short-term nature. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820 Fair Value Measurement, defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". The company uses the following three level valuation hierarchy based upon observable and non -observable inputs: Level 1 — Quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. Level 2 -- Other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 — Unobservable inputs that are used to measure fair value to the extent that observable inputs are not available. This valuation method utilizes management's estimates of market participant assumptions. Operating Cycle The company's work is normally performed under fixed-price contracts. The length of the company's contracts varies but is typically about two years. Therefore, assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying consolidated balance sheets as they will be liquidated in the normal course of contract completion, although this may require more than one year. Principles of Consolidation The consolidated financial statements include the accounts of KAST CONSTRUCTION COMPANY LLC and KAST CONSTRUCTION III LLC, a wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated, Contracts Receivable Contracts receivable are carried at the outstanding amount due less an allowance for doubtful accounts, if an allowance is deemed necessary. Allowance for doubtful accounts are established when there is a basis to doubt the full collectability of the contracts receivable. On a periodic basis, the company evaluates its contracts receivable and determines the requirement for an allowance, based on its history of past write-offs, collections and current conditions. When a contract receivable is ultimately determined to be uncollectible and due diligence for collection has taken place, the contract receivable is written -off. 8