1.

current ratio, quick ratio and inventory turn over

2.increase in sales and market size
3.
4
5 because they did offering a wide selection of merchandise not found in any one brick-andmortar toy store
6
7 $.81 purchasing the product, $.29 on the website and technology expenses, $.33 on distribution
costs, $.37 on advertising, and $.47 on other operating expenses
8.
9. $11,295 million
10. The pro forma adjustment is for goodwill amortization of $9.5 million
and $36.8 million for the years ended March 31, 2000 and 1999, respectively.
Goodwill amortization for the year ended March 31, 2000 reflects the reduction of goodwill
associated with the sale of CHI which occurred in January 2000.
The pro forma adjustment is to adjust weighted average shares outstanding for the year
ended March 31, 2000. As the acquisition of BabyCenter was completed on July 1, 1999, the
historical weighted average shares outstanding only reflect the issuance of shares for the
purchase of BabyCenter from the original date of issuance on July 1, 1999, or nine months.
Accordingly,the weighted average shares for basic and diluted net loss per share has been
adjusted to give effect to the shares being issued and outstanding for the year ended March 31,
2000.
11. Yes, because the adjustments is useful for estimating trends and forecasting future
performance
12. What is the impact of the pro forma adjustments on the balance sheet?
The pro forma financial information gives effect to the following pro forma
adjustments:
1. In accordance with the reorganization agreement for the BabyCenter
merger:
The BabyCenter merger has been accounted for using the purchase method of
accounting. The purchase price was based on $11.00 per share, which was the
mid-point of the Company's filing range at the announcement of the BabyCenter
merger.
The purchase price was determined as follows:
BABYCENTER
FAIR VALUE
SHARES ETOYS SHARES (IN THOUSANDS)
---------- ------------ -------------<S>
<C>
<C>
<C>
Shares............................... 7,651,521 16,003,095
$176,034

Stock options........................ 1,299,027 2,716,905

13,953
---------- -----------------Totals............................. 8,950,548 18,720,000
$189,987
========== ===========
The BabyCenter shares were first converted to the Company's equivalent
shares by taking the number of BabyCenter shares multiplied by the exchange
ratio of approximately 2.09 shares of the Company for each BabyCenter share.
The fair value of "shares" was calculated by taking the fair value of the
stock ($11.00 per share) times the number of the Company's shares to be
exchanged.
With respect to stock options exchanged as part of the BabyCenter merger,
all vested and unvested BabyCenter options exchanged for the Company's options are included
as part of the purchase price based on their fair value.
The fair value of the stock was calculated by taking the vested and unvested options to
purchase the Company's shares (2,716,905 options) times the fair value of the stock ($11.00 per
share) less the proceeds which will be received from the optionholders upon exercise.
2. The pro forma adjustment is for goodwill allocation of $183.9 million.
3. The pro forma adjustments are for purchase price adjustments applied to certain assets
acquired and liabilities assumed in connection with the
BabyCenter merger aggregating to $2.6 million.
4. The pro forma adjustment to stockholders' equity reflects the
elimination of BabyCenter's stockholders' equity ($8.6 million) and the impact of the issuance of
the Company's common stock ($190.0 million) in connection with the BabyCenter merger.
13. What additional information is provided by the balance sheet adjustments to outside users of
the financial statements?
It shows the cumulative effect of the change on net income and retained earnings, and show net
income on a pro forma basis as if the newly adopted accounting principle had been used in prior
periods
14.
(1) the balance sheet will provide a better indication of the remaining value of
goodwill;
(2) the income statement will be void of arbitrarily determined, straight-line
amortizations of a potentially still-valid asset (goodwill); and
(3) the financial statement and footnote disclosures relative to goodwill will provide "users with
a better understanding of the expectations about and changes in those assets over time, thereby
improving their ability to assess future profitability and cash flows

15. Refer to the income statement for the year ending March 31, 2000 appearing in the press
release for eToys in Exhibit 6.
a. Can you recognize the accounting earnings reported in the income statement? Explain your
response. b. What were the pro forma earnings reported by eToys for the year ending March 31,
2000?
Goodwill amortization is 9,452 million
Share used to compute basic and diluted net loss per share is 3,990 million
c. What explains the difference between the accounting earnings and the pro forma earnings?
a) Items sometimes excluded in pro-forma earnings figures include write-downs, goodwill
amortization, depreciation, restructuring and merger costs, interest, taxes, stock based employee
pay and other expenses.
b) pro-forma earnings do not comply with any standardized rules or regulations. As a result,
positive pro-forma earnings can become negative once GAAP requirements are applied and
certain items are included in the calculations
d. If you were a stockholder in this company, which set of earnings would you use to make
decisions regarding this company? Pro-forma earning, because this company has positive proforma earning
16. Describe the relationship between the pro forma net loss reported in the quarterly press
releases and the net loss reported in the 10-Q quarterly reports filed with the SEC.
a. How might readers of the press release be misled by the companys earnings statements?
Because the positive pro-forma earnings can become negative once GAAP requirements are
applied and certain items are included in the calculations so it will misle the reader of press
release
b. Why might the company argue that the information in the pro forma numbers is better than the
information reported to the SEC?
because pro forma forma income statement combines the historical income statement of the
acquiring company and a pro forma income statement of the business to be acquired for the
previous five years, if possible. Pro forma adjustments exclude overhead costs not applicable to the
new business entity, such as division and head office expenses.