(Amounts in millions, except per share data)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year

The company’s fiscal year ends on the Saturday nearest to January 31. References to 2001, 2000, and 1999 are for the 52 weeks ended February 2, 2002, the 53 weeks ended February 3, 2001 and the 52 weeks ended January 29, 2000, respectively.

Reclassification

Certain amounts in 2000 and 1999 have been reclassified to conform to the 2001 presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Assets and liabilities of foreign operations are translated at current rates of exchange at the balance sheet date while results of operations are translated at average rates in effect for the period. Unrealized translation gains or losses are shown as a component of accumulated other comprehensive loss within stockholders’ equity.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

The company recognizes retail sales at the time the guest takes possession of merchandise or the point of sale. Revenues from the sale of gift cards and issuance of store credits are recognized when they are utilized or redeemed.

Advertising Costs

Net advertising costs are included in selling, general and administrative expenses and are expensed at the point of first broadcast or distribution. Net advertising costs were $166, $135, and $125 for 2001, 2000 and 1999, respectively.

Cash and Cash Equivalents

The company considers its highly liquid investments with original maturities of less than three months to be cash equivalents.

Merchandise Inventories

Merchandise inventories for the U.S. toy store division, which represent approximately 70% of total inventories, are stated at the lower of LIFO (last-in, first-out) cost or market, as determined by the retail inventory method. If inventories had been valued at the lower of FIFO (first-in, first-out) cost or market, inventories would show no change at February 2, 2002 or February 3, 2001. All other merchandise inventories are stated at the lower of FIFO cost or market as determined by the retail inventory method.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets or, where applicable, the terms of the respective leases, whichever is shorter. The company evaluates the need to recognize impairment losses relating to long-lived assets based on several factors including, but not limited to, management’s plans for future operations, recent operating results and projected cash flows.

Financial Instruments

The company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, effective February 4, 2001, as discussed in the footnote “Derivative Instruments and Hedging Activities.” This statement requires that all derivatives be recorded on the balance sheet at fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria is met.

The company enters into forward foreign exchange contracts to minimize the risk associated with currency movement relating to its short-term intercompany loan program with foreign subsidiaries. Gains and losses, which offset the movement in the underlying transactions, are recognized as part of such transactions. Gross deferred unrealized gains and losses on the forward contracts were not material at either February 2, 2002 or February 3, 2001. The related receivable, payable and deferred gain or loss are included on a net basis in the balance sheet. The company had $158 and $95 of short-term outstanding forward contracts at February 2, 2002 and February 3, 2001, maturing in 2002 and 2001, respectively. These contracts are entered into with counter-parties that have high credit ratings and with which the company has the contractual right to net forward currency settlements.

PROPERTY AND EQUIPMENT

Included in accumulated depreciation and amortization is approximately $26 and $24 related to assets under capital lease at February 2, 2002 and February 3, 2001, respectively.