The document discusses goodwill as an intangible asset for a business. It defines goodwill as the value of a firm's reputation and customer loyalty that allows it to earn above-normal profits. The document then covers different types of goodwill, factors that contribute to goodwill, and several methods for calculating the value of goodwill, including average profits, super profits, and capitalization methods.
The document discusses goodwill as an intangible asset for a business. It defines goodwill as the value of a firm's reputation and customer loyalty that allows it to earn above-normal profits. The document then covers different types of goodwill, factors that contribute to goodwill, and several methods for calculating the value of goodwill, including average profits, super profits, and capitalization methods.
The document discusses goodwill as an intangible asset for a business. It defines goodwill as the value of a firm's reputation and customer loyalty that allows it to earn above-normal profits. The document then covers different types of goodwill, factors that contribute to goodwill, and several methods for calculating the value of goodwill, including average profits, super profits, and capitalization methods.
The document discusses goodwill as an intangible asset for a business. It defines goodwill as the value of a firm's reputation and customer loyalty that allows it to earn above-normal profits. The document then covers different types of goodwill, factors that contribute to goodwill, and several methods for calculating the value of goodwill, including average profits, super profits, and capitalization methods.
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By: ANSH GARG
Exampl e:
Business overall Net Value of value is 15 business is 10 million million 5 million extra i s for Brand Name + The customers + The suppliers + Its workforce = Goodwill 5 million extra i s for Brand Name + The customers + The suppliers + Its workforce = Goodwill 5 million extra i s for Brand Name + The customers + The suppliers + Its workforce = Goodwill “Goodwill is nothing more than the probability that the old customers will resort to the old place. In other words, Goodwill is the value of good name or reputation enjoyed by the firm that enables it to earn profit over and above normal profits.” Goodwill is not a fictitious asset as it has high realisable value. It is an intangible asset as it cannot be seen or touched. 1. Good Public Relation 2. Regular Customers 3. Quality Maintenance 4. Management Skills 5. Location 6. Good Relation with Suppliers 7. Employees CLASSIFICATION OF GOODWILL
Purchased Goodwill a) Purchased Goodwill: It is the goodwill that is acquired by making a payment. For example, when a business is purchased, the excess of purchase consideration over its Net Assets is the Purchased Goodwill. CLASSIFICATION OF GOODWILL
b) Self Generated Goodwill: It is an internally
generated goodwill which arises from a number of factors(such as good location, efficient management, good quality of products, etc.) that a running business possesses due to which it is able to earn a higher profit. 1. Average Profits Method 2.
3. Super Profits Method
4.
5. Capitalization Method Goodwill = Average Profits X Number of years of Purchase ¡ Before calculating the average profits the following adjustments should be made in the profits of the firm: a) Any abnormal profits should be deducted from the net profits of that year. b) Any abnormal loss should be added back to the net profits of that year. c) Non-operating incomes e.g. income from investments etc should be deducted from the net profits of that year. ¡ Goodwill is calculated on the basis of Super Profits i.e. the excess of actual profits over the average profits. ¡ For example if the normal rate of return in a particular type of business is 20% and your investment in the business is Rs10,00,000 then your normal profits should be Rs 2,00,000 . But if you earned a net profit of Rs 2,30,000 then Rs 2,30,000 – Rs 2,00,000 = Rs 30,000 are your super profits. ¡ For calculating Goodwill, Super Profits are multiplied by the number of ▪
year of purchase. i. Normal profits = Capital Invested × Normal rate of return/100 ii. Super Profits = Actual profits – Normal Profits
iii. Goodwill = Super Profits × No. of years
purchased 1. Capitalization of Average Profits Method 2.
3. Capitalization of Super Profits Method
1. Capitalization of Average Profits Method ▪Under this method we calculate the average profits and then assess the capital needed for earning such average profits on basis of normal rate of return. such capital is called capitalization value of average profit. 1. Capitalization of Average Profits Method ▪ Goodwill = capitalized value of the firm - net assets ▪ Capitalized value = average profit/normal rate of return*100 ▪ Net assets =total assets-external liabilities 1. Capitalization of Average Profits Method ▪ Example: ▪
▪ A firm earns Rs.65000 as its average profits.
The usual rate of earnings is 10%.the total assets of the firm amounted to Rs.680000 and liabilities are Rs.180000. 1. Capitalization of Average Profits Method ▪ Calculation: ▪
▪ Total Capitalization Value=65000/10*100 = 650000 ▪ Net Assets = 680000-180000 = 500000 ▪ Goodwill = Total Capitalization Value - Net Assets = 650000 - 500000 = 150000 2. Capitalization of Super Profits Method ▪ we calculate the Super Profits and then calculate the capital needed for earning such super profits on the basis of normal rate of return ▪ Goodwill = Super Profits X (100/ Normal Rate of Return) 2. Capitalization of Super Profits Method ▪ Example: ▪
▪ Verma Brothers earn a profit of Rs. 90,000
with a capital of Rs. 4, 00,000. The normal rate of return in the business is 15%. 2. Capitalization of Super Profits Method ▪ Calculation ▪
Normal Profit = Rs. 4, 00,000 x 15/100 = Rs.
▪
60,000 ▪ Super Profit = Rs. 90,000 – Rs. 60,000 = Rs. 30,000 ▪ Goodwill = Super Profit x 100/Normal Rate of Return = Rs. 30,000 x 100/15 = Rs. 2, 00,000
