Note 3 – Inventories

Inventories consisted of the following:


	September 30, 2014		December 31, 2013
Finished goods	$	665,113	$	501,229
Raw materials		20,709		15,921
Work in process		8,574		7,211

	$	694,396	$	524,361

Inventories are valued at the lower of cost or market. The Company determines the cost of inventory at its retail stores using the weighted average method. Other inventory cost is determined principally using the first-in, first-out method.

The Company estimates retail inventory shortages for the periods between physical inventory dates on a store-by-store basis. Inventory shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.

On July 27, 2012, PC Merger Sub, Inc., a wholly-owned subsidiary of PC Intermediate, merged into PCHI, with PCHI being the surviving entity (“the Transaction”). As a result of the Transaction, the Company applied the acquisition method of accounting and increased the value of its inventory by $89,754 as of July 28, 2012. The adjustment principally reflects the previously deferred wholesale margin on inventory supplied to the Company’s retail operations and on hand at July 27, 2012. Such adjustment increased the Company’s cost of sales during the three months ended September 30, 2014 and September 30, 2013 by $550 and $2,616, respectively, as the related inventory was sold. Additionally, such adjustment increased the Company’s cost of sales during the nine months ended September 30, 2014 and September 30, 2013 by $3,356 and $21,979, respectively, as the related inventory was sold. At September 30, 2014 and December 31, 2013, $2,543 and $5,899 of the adjustment remained in finished goods, respectively.