Valuation on goodwill ppt on

1. 1

2. Meaning of Goodwill
• It is a good name or reputation earned by a firm.
• It is an intangible asset.
• It is the value of business over and above the
value of its assets.
• It is the difference between the purchase price
and the value of net assets.
• It has a positive impact on the future turnover
and profits of the business.
Prepared by: Dr. Kawale Pushpalata 2

3. Factors Affecting Valuation of Goodwill
1. Good Public Relation
2. Regular Customers
3. Quality Product in Reasonable Price
4. Management Skills
5. Location of Business
6. Good Relation with Suppliers
7. Employees
Prepared by: Dr. Kawale Pushpalata 3

4. Methods of Valuation of Goodwill
1. Simple Average Profit Method
2. Super Profit Method
3. Weighted Average Method
4. Capitalization Method
a. Capitalization of Average Profit Method
b. Capitalization of Super Profit Method
Prepared by: Dr. Kawale Pushpalata 4

5. 1. Simple Average Profit Method
• Goodwill = Average Profit * Number of year of purchase
• Average Profit = Total Profit / Number of Years
• Number of years of purchase means the number of year
for which the firms is likely to earn the same amount of
profit.
Prepared by: Dr. Kawale Pushpalata 5

6. • Things to consider before calculating the average
profits :-
1. Any abnormal profit should be deducted from the
net profits of that year.
2. Any abnormal loss should be added back to the
net profits of that year.
3. Non-operating incomes e.g. income from
investments should be deducted from the net profits
of that year.
Prepared by: Dr. Kawale Pushpalata 6

7. Illustration No. 1
• Following details are available about Alpha ltd.
1. Profits 2010 ₹ 100000, 2011- ₹ 125000,
2012- ₹ 140000
2. Profits of 2010 have been reduced by ₹ 15000 because
goods were destroyed by fire.
3. Non-recurring income of ₹ 10000 is included in the profit
of 2011.
4. Profits of 2012 include ₹ 10000 income from investment.
Calculate goodwill on the basis of four years’
purchase of the average profit of last three years.
Prepared by: Dr. Kawale Pushpalata 7

8. Solution :-
1. Profit of 2010 ₹ 100000 add ₹ 15000 = ₹ 115000
2. Profit of 2011 ₹ 125000 less ₹ 10000 = ₹ 115000
3. Profit of 2012 ₹ 140000 less ₹ 10000 = ₹ 130000
Average Profit/ Future Maintainable Profit
= Total Profit / No. of Years Purchase
= 360000 / 3
= 120000
Goodwill = Future Maintainable Profit * No. of years
purchase
= 120000 * 3
= 40000
Prepared by: Dr. Kawale Pushpalata 8

9. Thank You
Prepared by: Dr. Kawale Pushpalata 9