Notes to Consolidated Financial Statements  (continued) (n) Cost of Merchandise Sold  (o) Selling, General, and Administrative Expenses  (p) Store Preopening Expenses  (q) Advertising  (r) Income Taxes  (s) Loss Per Share  (t) Stock-Based Compensation  (u) Comprehensive Loss  (v) Fair Value of Financial Instruments  (w) Use of Estimates  (x) Sales Tax Policy  (y) Foreign Currency Translation  Cost of merchandise sold includes the cost of the merchandise,  including royalties paid to licensors of third party branded  merchandise; store occupancy cost, including store depreciation and  store asset impairment charges; cost of warehousing and distribution;  packaging; stuffing; damages and shortages; and shipping and  handling costs incurred in shipment to customers.  Selling, general, and administrative expenses include store payroll  and related benefits, advertising, credit card fees, store supplies and  store closing costs, as well as central office management payroll  and related benefits, travel, information systems, accounting,  insurance, legal, and public relations. It also includes depreciation  and amortization of central office leasehold improvements, furniture,  fixtures, and equipment, as well as amortization of trademarks and  intellectual property.  Store preopening expenses, including store set-up, certain labor and  hiring costs, and rental charges incurred prior to store openings  are expensed as incurred and are included in selling, general and  administrative expenses.  The costs of advertising and marketing programs are charged to  operations in the first period the program takes place. Advertising  expense was $23.7 million, $23.0 million and $19.3 million for fiscal  years 2013, 2012 and 2011, respectively.  Income taxes are accounted for using a balance sheet approach  known as the asset and liability method. The asset and liability  method accounts for deferred income taxes by applying the statutory  tax rates in effect at the date of the consolidated balance sheets to  differences between the book basis and the tax basis of assets and  liabilities. Deferred taxes are reported on a jurisdictional basis.  Noncurrent deferred tax assets are included in other assets, net and  noncurrent deferred tax liabilities are included in other liabilities.  Tax positions are reviewed at least quarterly and adjusted as new  information becomes available. The recoverability of deferred tax  assets is evaluated by assessing the adequacy of future expected  taxable income from all sources, including reversal of taxable  temporary differences, forecasted operating earnings and available  tax planning strategies. These estimates of future taxable income  inherently require significant judgment. To the extent it is considered  more likely than not that a deferred tax asset will be not recovered, a  valuation allowance is established.  The Company accounts for its total liability for uncertain tax  positions according to the provisions of ASC section 740-10-25. The  Company recognizes estimated interest and penalties related to  uncertain tax positions in income tax expense. See Note 8—Income  Taxes for further discussion.  Under the two-class method, basic loss per share is determined by  dividing net loss allocated to common stockholders by the weighted  average number of common shares outstanding during the period  since our participating securities do not contractually participate  in losses. Diluted earnings or loss per share reflects the potential  dilution that could occur if options to issue common stock were  exercised. In periods in which the inclusion of such instruments is  anti-dilutive, the effect of such securities is not given consideration.  The Company has share-based compensation plans covering the  majority of its management groups and its Board of Directors. The  Company accounts for share-based payments utilizing the fair value  recognition provisions of ASC section 718. The Company recognizes  compensation cost for equity awards over the requisite service period  for the entire award. See Note 12 – Stock Incentive Plans. For fiscal  2013, 2012 and 2011, selling, general and administrative expense  includes $2.8 million, $3.6 million and $4.6 million, respectively, of  stock-based compensation expense. Comprehensive loss is comprised of net loss and foreign currency  translation adjustments.  For purposes of financial reporting, management has determined  that the fair value of financial instruments, including cash and cash  equivalents, receivables, accounts payable and accrued expenses,  approximates book value at December 28, 2013 and December 29,  2012.  The preparation of the consolidated financial statements requires  management of the Company to make a number of estimates and  assumptions relating to the reported amount of assets and liabilities  and the disclosure of contingent assets and liabilities at the date of  the consolidated financial statements and the reported amounts of  revenues and expenses during the reporting period. The assumptions  used by management in future estimates could change significantly  due to changes in circumstances, including, but not limited to,  challenging economic conditions. Accordingly, future estimates may  change significantly. Significant items subject to such estimates and  assumptions include the valuation of long-lived assets, including  trade credits and deferred income tax assets, inventories, and the  determination of deferred revenue under the Company’s customer  loyalty program.  The Company’s revenues in the consolidated statement of operations  are net of sales taxes.  Assets and liabilities of the Company’s foreign operations with  functional currencies other than the U.S. dollar are translated at  2013 FORM 10-K 40  BUILD-A-BEAR WORKSHOP, INC. 