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Toys"R"Us, Inc. Case Toys R Us, Inc. and Subsidiaries Notes to the Consolidated Financial Statements Inventory Management We continue to focus on enhancing the customer experience by improving our in-stock position to ensure we have the hot products that customers are looking for, while at the same time maintaining healthy inventory levels. Additionally, our product life cycle management process continues to help reduce clearance margin risk by instituting greater discipline around product exit dates. Merchandise Inventories We value our merchandise inventories at the lower of cost or net realizable value, as determined by the weighted average cost method. Cost of sales under the weighted average cost method represents the weighted average cost of the individual items sold. Cost of sales under the weighted average cost method is also affected by adjustments to reflect current market conditions, merchandise allowances from vendors, expected inventory shortages and estimated losses from obsolete and slow-moving inventory. Merchandise inventories and related reserves are reviewed on an interim basis and adjusted, as appropriate, to reflect managements current estimates. These estimates are derived using available data, our historical experience, estimated inventory turnover and current purchase forecasts. Various types of negotiated allowances received from our vendors are generally treated as adjustments to the purchase price of our merchandise inventories. We adjust our estimates for vendor allowances and our provision for expected inventory shortage to actual amounts at the completion of our physical inventory counts and finalization of all vendor allowance agreements. In addition, we perform an inventory-aging analysis for identifying obsolete and slow-moving inventory. We establish a reserve to reduce the cost of our inventory to its estimated net realizable value based on certain loss indicators which include aged inventory and excess supply on hand, as well as specific identification methods. Our estimates may be impacted by changes in certain underlying assumptions and may not be indicative of future activity. For example, factors such as slower inventory turnover due to changes in competitors tactics, consumer preferences, consumer spending and inclement weather could cause excess inventory requiring greater than estimated markdowns to entice consumer purchases. Such factors could also cause sales shortfalls resulting in reduced purchases from vendors and an associated reduction in vendor allowances. Our reserve for merchandise inventories was $101 million and $68 million as of January 28, 2017 and January 30, 2016, respectively. Based on our inventory aging analysis for identifying obsolete and slow-moving inventory, a 10% change in our reserve, excluding the impact of our specific item reserves, would have impacted pre-tax earnings by $6 million for fiscal 2016. Goodwill At January 28, 2017 and January 30, 2016 our Toys-China and Southeast Asia reporting unit (included in our International segment) had $64 million of Goodwill, respectively. Goodwill is evaluated for impairment annually as of the last day of the eleventh fiscal month or whenever we identify certain events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount, in accordance with the provisions of ASC Topic 350, Intangibles - Goodwill and Other (ASC 350). Events or circumstances that might warrant an interim evaluation include, among other things, a significant adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel, an adverse change in legal factors and a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of. ASC 350 provides an entity with the option to first assess qualitative factors for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step quantitative impairment test. The optional qualitative assessment can be performed at the discretion of management for any or all of the reporting units in any given period. In the fourth quarter of fiscal 2016, we performed a quantitative assessment for our Toys-China and Southeast Asia reporting unit and it was determined that the goodwill was not impaired. NOTE 5 PROPERTY AND EQUIPMENT The following detail of property and equipment includes estimated useful lives which are generally used to depreciate the assets on a straight-line basis: In millions) Useful life (in years) January 28, 2017 January 30, 2016 nd $ 664 $ 676 uildings 45-50 1,911 1,932 rniture and equipment 3-20 1,409 1,472 operty and leasehold improvements 5-25 2,439 2,493 osts of computer software 5 214 224 onstruction in progress 96 71 ased equipment under capital lease 3-5 17 32 6,750 6,900 ss: accumulated depreciation and amortization 3,667 3,721 3,083 3,179 ss: net assets held for sale 16 16 tal $ 3,067 $ 3,163 Assets held for sale Assets held for sale represent assets owned by us that we have committed to sell. In fiscal 2015, we entered into a contract to sell surplus land. The sale is contingent upon the buyer obtaining municipal approval to re-zone the property and as a result, the period required to complete the sale has been extended beyond one year. The asset has been classified as non-current and included in Other assets on our Consolidated Balance Sheets. Therefore, as of January 28, 2017 and January 30, 2016, we had $16 million of net assets classified as held for sale. Net gains on sales of properties During fiscals 2016, 2015 and 2014, we sold certain properties and assets for cash proceeds of $3 million, $13 million and $18 million, respectively, resulting in net gains of $1 million, $20 million and $5 million, respectively, which were recorded in Other income, net on our Consolidated Statements of Operations. Fiscal 2016 cash proceeds and net gains exclude the sale of intellectual property. Capital Expenditures A component of our long-term strategy is our capital expenditure program. Our capital expenditures are primarily for enhancing our e-commerce and other information technology and logistics systems, as well as improving existing stores and construction of new stores. Capital expenditures are funded primarily through cash provided by operating activities, as well as available cash. The following table presents our capital expenditures for each of the past three fiscal years: Toys"R"Us, Inc. Case Toys R Us, Inc. and Subsidiaries Notes to the Consolidated Financial Statements Inventory Management We continue to focus on enhancing the customer experience by improving our in-stock position to ensure we have the hot products that customers are looking for, while at the same time maintaining healthy inventory levels. Additionally, our product life cycle management process continues to help reduce clearance margin risk by instituting greater discipline around product exit dates. Merchandise Inventories We value our merchandise inventories at the lower of cost or net realizable value, as determined by the weighted average cost method. Cost of sales under the weighted average cost method represents the weighted average cost of the individual items sold. Cost of sales under the weighted average cost method is also affected by adjustments to reflect current market conditions, merchandise allowances from vendors, expected inventory shortages and estimated losses from obsolete and slow-moving inventory. Merchandise inventories and related reserves are reviewed on an interim basis and adjusted, as appropriate, to reflect managements current estimates. These estimates are derived using available data, our historical experience, estimated inventory turnover and current purchase forecasts. Various types of negotiated allowances received from our vendors are generally treated as adjustments to the purchase price of our merchandise inventories. We adjust our estimates for vendor allowances and our provision for expected inventory shortage to actual amounts at the completion of our physical inventory counts and finalization of all vendor allowance agreements. In addition, we perform an inventory-aging analysis for identifying obsolete and slow-moving inventory. We establish a reserve to reduce the cost of our inventory to its estimated net realizable value based on certain loss indicators which include aged inventory and excess supply on hand, as well as specific identification methods. Our estimates may be impacted by changes in certain underlying assumptions and may not be indicative of future activity. For example, factors such as slower inventory turnover due to changes in competitors tactics, consumer preferences, consumer spending and inclement weather could cause excess inventory requiring greater than estimated markdowns to entice consumer purchases. Such factors could also cause sales shortfalls resulting in reduced purchases from vendors and an associated reduction in vendor allowances. Our reserve for merchandise inventories was $101 million and $68 million as of January 28, 2017 and January 30, 2016, respectively. Based on our inventory aging analysis for identifying obsolete and slow-moving inventory, a 10% change in our reserve, excluding the impact of our specific item reserves, would have impacted pre-tax earnings by $6 million for fiscal 2016. Goodwill At January 28, 2017 and January 30, 2016 our Toys-China and Southeast Asia reporting unit (included in our International segment) had $64 million of Goodwill, respectively. Goodwill is evaluated for impairment annually as of the last day of the eleventh fiscal month or whenever we identify certain events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount, in accordance with the provisions of ASC Topic 350, Intangibles - Goodwill and Other (ASC 350). Events or circumstances that might warrant an interim evaluation include, among other things, a significant adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel, an adverse change in legal factors and a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of. ASC 350 provides an entity with the option to first assess qualitative factors for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step quantitative impairment test. The optional qualitative assessment can be performed at the discretion of management for any or all of the reporting units in any given period. In the fourth quarter of fiscal 2016, we performed a quantitative assessment for our Toys-China and Southeast Asia reporting unit and it was determined that the goodwill was not impaired. NOTE 5 PROPERTY AND EQUIPMENT The following detail of property and equipment includes estimated useful lives which are generally used to depreciate the assets on a straight-line basis: Assets held for sale Assets held for sale represent assets owned by us that we have committed to sell. In fiscal 2015, we entered into a contract to sell surplus land. The sale is contingent upon the buyer obtaining municipal approval to re-zone the property and as a result, the period required to complete the sale has been extended beyond one year. The asset has been classified as non-current and included in Other assets on our Consolidated Balance Sheets. Therefore, as of January 28, 2017 and January 30, 2016, we had $16 million of net assets classified as held for sale. Net gains on sales of properties During fiscals 2016, 2015 and 2014, we sold certain properties and assets for cash proceeds of $3 million, $13 million and $18 million, respectively, resulting in net gains of $1 million, $20 million and $5 million, respectively, which were recorded in Other income, net on our Consolidated Statements of Operations. Fiscal 2016 cash proceeds and net gains exclude the sale of intellectual property. Capital Expenditures A component of our long-term strategy is our capital expenditure program. Our capital expenditures are primarily for enhancing our e-commerce and other information technology and logistics systems, as well as improving existing stores and construction of new stores. Capital expenditures are funded primarily through cash provided by operating activities, as well as available cash. The following table presents our capital expenditures for each of the past three fiscal years: n millions) Fiscal 2016 Fiscal 2015 Fiscal 2014 formation technology $ 86 $ 83 $ 79 ore improvements (1) 53 64 58 stribution centers 23 28 31 tal capital expenditures $ 252 $ 219 $ 207 1. Using the Consolidated Balance Sheets for Toys R Us, prepare a common-size balance sheet. n millions) Fiscal 2016 Fiscal 2015 Fiscal 2014 formation technology $ 86 $ 83 $ 79 ore improvements (1) 53 64 58 ew stores 33 17 32 stribution centers 23 28 31 ther store-related projects (2) 57 27 7 tal capital expenditures $ 252 $ 219 $ 207

Which current asset is the most significant? Which noncurrent asset is the most significant? Are the relative proportions of current and noncurrent assets what you would expect for a retail store?

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