No don't worry. Toddlers actually DON'T know the difference between fact and fiction - it's all a big blur to them. Movies, books and real life events are all "stories" to kids this age. School age kids, on the other hand, do know the difference between fact and fantasy and we do hold them accountable for telling us the truth. Untrue stories told by 6 year olds are called "lies" whereas untrue stories told by 3 yr olds are called "Tall Tales." Just tell your daughter that you like her story - it is very imaginative. She'll grow out of this stage on her own very soon.   Sarah Chana