I am always astonished at the evidence that, not only do small children hear, but that they understand what they hear, evidenced in their laughing when the music is funny. I am not referring to music with text, but to music, plain and simple.
Recently it was the Mozart Sonata in A (with the Rondo a la Turk, one of my favorites) that brought expressions of glee to the face of a rapt three-year-old.
Many years ago it was the fugue in Beethoven's C Major Sonata for Piano and Cello that caused a two-year-old to giggle out loud.
When I was still able to tolerate teaching in a music school I noticed that the curriculum directed to young children was decidedly based on the assumption that they did not hear, that they needed to be told what to hear and how to hear it.
You may be sure I kept my children out of that environment.