LeapFrog 2003 Annual Report Download - page 76

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
The Company also provides for allowances related to returns, discounts and defective products. The
Company records these allowances on product sales in the same period that the related revenues are recorded.
The Company bases these estimates on historical sales returns, defective returns, analysis of credit memoranda
and other known factors, as required.
Shipping and Handling Costs
Costs to ship merchandise from the Company’s warehouse facilities to customers are recorded in cost of
goods sold.
Content and Video Capitalization and Amortization
The Company capitalizes certain external costs related to the content development of its books.
Amortization of these costs begins when the respective book is initially released for sale and is then amortized
over a three-year life using the sum of the years digits method. In the years ended December 31, 2003 and 2002,
the Company capitalized $1,662 and $3,616, respectively, and amortized $3,604 and $1,991, respectively, of
external content development costs. Capitalized content development is included in property and equipment, and
the related amortization is included in cost of sales.
The Company capitalizes costs related to the production of home video in accordance with AICPA
Statement of Accounting Position No. 00-2, “Accounting by Producers or Distributors of Film.” Video
production costs are amortized based on the ratio of the current period’s gross revenues to estimated remaining
total gross revenues from all sources on an individual production basis. In the year ended December 31, 2003, the
Company capitalized $1,015 and amortized $620 of video production costs. The Company had no video
production cost in prior years. Capitalized video production cost is included in property and equipment, and the
related amortization is included in cost of sales.
Advertising Expense
Production costs of commercials and programming are expensed when the production is first aired. The
costs of advertising, in-store displays and promotion programs are expensed as incurred. Advertising costs
associated with cooperative advertising are accrued as the related revenue is recognized.
Translation of Foreign Currencies
Assets, liabilities and operations of the Company’s United Kingdom, Hong Kong, France and Mexico
subsidiaries are recorded based on their functional currency. When included in these consolidated financial
statements, the assets and liabilities are translated at period-end exchange rates and revenues and expenses are
translated at the average of the monthly exchange rates that were in effect during the year. The resulting
translation adjustments are included as a separate component of equity. Foreign currency transaction gains and
losses are included in income as incurred. In the year ended December 31, 2003 and 2002, respectively,
transaction gains included in other income totaled $2,776 and $987, respectively. In 2001, transaction gain/loss
was immaterial.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and highly liquid short-term fixed income
municipal securities with an original maturity of 90 days or less.
Short-Term Investments
Short-term investments consist primarily of fixed income municipal securities and auction preferred
securities with maturities of one year or less. The Company classifies all short-term investments as available-for-
sale. Available-for-sale securities are carried at estimated fair value, based on available market information, with
F-8