Valuation of goodwill Methods
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Valuation of goodwill
Valuation of Goodwill, types of goodwill, factors affecting goodwill, features of goodwill, methods of calculating goodwill
valuation of goodwill
This document provides information about valuing goodwill, including definitions, methods, and an example problem. It begins with defining goodwill as the value of expected future profits above normal profits due to reputation and attributes. It then describes the capitalization, average profits, and super profits methods for valuation. An example problem applies the super profits method to calculate goodwill value using profits data and capital employed for Gee Ltd over four years.
Rectification of errors with accounting terms
This document discusses various types of accounting errors and how to rectify them. It outlines two main types of errors: two-sided errors, which do not affect the trial balance, and one-sided errors, which do affect the trial balance. Two-sided errors include errors of omission, commission, original entry, principle, and compensating errors. One-sided errors require using a suspense account to rectify. The document provides examples for each type of error and explains how to make the correcting journal entries to rectify the errors.
Valuation of goodwill & shares with solution of problems
The document discusses various methods for valuing goodwill, including:
1) Future Maintainable Profits Method - Which values goodwill based on the future profits a business is expected to maintain. It calculates average past profits over several years to estimate future profits.
2) Super Profits Method - Which values goodwill based on "super profits", the amount of profits earned above a business's normal rate of return on capital employed. Super profits are multiplied by the number of years of purchase to value goodwill.
3) Number of Years Purchase Method - Which values goodwill as the future maintainable profits multiplied by the number of years those profits are expected to continue into the future.
The document provides examples
leverages
This document discusses different types of leverage used in finance including operating leverage, financial leverage, and composite leverage. It defines operating leverage as a firm's ability to use fixed costs to magnify returns, which is determined by the cost structure. Financial leverage is defined as using fixed financing charges to magnify earnings effects, determined by capital structure. Composite leverage expresses the relationship between sales, operating profits, and taxable income. It combines the effects of operating and financial leverage.
Goodwill
1. The document presents methods for calculating goodwill in a business. Goodwill represents the value of assets like brand name, customer base, supplier relationships, and workforce that are not separately recognized in a business acquisition.
2. There are three main methods discussed: average profits method, super profits method, and capitalization method. The average profits and super profits methods calculate goodwill as a multiple of average or excess profits. The capitalization method estimates goodwill as the difference between total capitalized value and net assets.
3. Examples are provided to demonstrate calculating goodwill under the super profits capitalization method. Goodwill is estimated as super profits multiplied by a capitalization rate based on normal returns.
Calculation of goodwill
This document discusses methods for valuing goodwill of a business. It defines goodwill as the value of a firm's reputation that generates profits above normal levels, known as super profits. The value of goodwill is affected by factors like location, nature of business, management efficiency, time in business, market situation, and special advantages. Goodwill needs to be valued when partners join, retire, die, or the business dissolves. Common valuation methods include average profits, weighted average profits, super profits, capitalization of average/super profits, and present value of super profits. Illustrative examples are provided for each method.
Amalgamation, absorption and purchase consideration
This presentation contain information regarding amalgamation, absorption, types of amalgamation, purchase consideration and different methods of calculating purchase consideration.
Recommended
Valuation of goodwill
Valuation of Goodwill, types of goodwill, factors affecting goodwill, features of goodwill, methods of calculating goodwill
valuation of goodwill
This document provides information about valuing goodwill, including definitions, methods, and an example problem. It begins with defining goodwill as the value of expected future profits above normal profits due to reputation and attributes. It then describes the capitalization, average profits, and super profits methods for valuation. An example problem applies the super profits method to calculate goodwill value using profits data and capital employed for Gee Ltd over four years.
Rectification of errors with accounting terms
This document discusses various types of accounting errors and how to rectify them. It outlines two main types of errors: two-sided errors, which do not affect the trial balance, and one-sided errors, which do affect the trial balance. Two-sided errors include errors of omission, commission, original entry, principle, and compensating errors. One-sided errors require using a suspense account to rectify. The document provides examples for each type of error and explains how to make the correcting journal entries to rectify the errors.
Valuation of goodwill & shares with solution of problems
The document discusses various methods for valuing goodwill, including:
1) Future Maintainable Profits Method - Which values goodwill based on the future profits a business is expected to maintain. It calculates average past profits over several years to estimate future profits.
2) Super Profits Method - Which values goodwill based on "super profits", the amount of profits earned above a business's normal rate of return on capital employed. Super profits are multiplied by the number of years of purchase to value goodwill.
3) Number of Years Purchase Method - Which values goodwill as the future maintainable profits multiplied by the number of years those profits are expected to continue into the future.
The document provides examples
leverages
This document discusses different types of leverage used in finance including operating leverage, financial leverage, and composite leverage. It defines operating leverage as a firm's ability to use fixed costs to magnify returns, which is determined by the cost structure. Financial leverage is defined as using fixed financing charges to magnify earnings effects, determined by capital structure. Composite leverage expresses the relationship between sales, operating profits, and taxable income. It combines the effects of operating and financial leverage.
Goodwill
1. The document presents methods for calculating goodwill in a business. Goodwill represents the value of assets like brand name, customer base, supplier relationships, and workforce that are not separately recognized in a business acquisition.
2. There are three main methods discussed: average profits method, super profits method, and capitalization method. The average profits and super profits methods calculate goodwill as a multiple of average or excess profits. The capitalization method estimates goodwill as the difference between total capitalized value and net assets.
3. Examples are provided to demonstrate calculating goodwill under the super profits capitalization method. Goodwill is estimated as super profits multiplied by a capitalization rate based on normal returns.
Calculation of goodwill
This document discusses methods for valuing goodwill of a business. It defines goodwill as the value of a firm's reputation that generates profits above normal levels, known as super profits. The value of goodwill is affected by factors like location, nature of business, management efficiency, time in business, market situation, and special advantages. Goodwill needs to be valued when partners join, retire, die, or the business dissolves. Common valuation methods include average profits, weighted average profits, super profits, capitalization of average/super profits, and present value of super profits. Illustrative examples are provided for each method.
Amalgamation, absorption and purchase consideration
This presentation contain information regarding amalgamation, absorption, types of amalgamation, purchase consideration and different methods of calculating purchase consideration.
Admission of a partner
The document discusses the process and accounting treatment for admitting a new partner to an existing partnership firm. Key points include:
- A new partner joins the firm and agrees to contribute capital and/or pay premium for their share of goodwill.
- Accounting adjustments are needed such as revising profit sharing ratios, calculating amounts old partners sacrifice to the new partner, and revaluing assets/liabilities.
- Goodwill can be treated via the premium, revaluation, or memorandum revaluation methods which involve debiting/crediting partner capital accounts.
- Other adjustments include redistributing reserves to old partners, adjusting total partner capital based on the new profit sharing ratio.
Redemption of preference share
Preference shares represent partial ownership in a company and carry preferential rights to dividends and assets. Preference shareholders receive dividends first before common shareholders and do not have voting rights. Preference shares can be redeemed either through company profits, issuing new shares, or a combination. When redeemed through profits, an equivalent amount must be transferred to a capital redemption reserve account.
Valuation of shares and valuation of goodwill
This document discusses methods for valuing goodwill and shares. It defines goodwill as a company's reputation and brand value that allows it to earn above-average profits. Methods for valuing goodwill described include the average profit method, super profit method, capitalization of profit method, and annuity method. These methods calculate goodwill based on adjusting a company's historical profits. The document also defines shares and discusses methods for valuing shares not publicly traded, including the net asset method, yield method, and earning capacity method. The net asset method values shares based on a company's net assets, the yield method based on expected dividend returns, and earning capacity method based on rate of profits earned.
Ratio Analysis
The document discusses various types of ratios used in ratio analysis for evaluating the financial performance and position of a business. It provides definitions and interpretations for liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and proprietary ratio, activity ratios like stock turnover ratio and debtor turnover ratio, and profitability ratios like gross profit ratio, net profit ratio, and return on capital employed. Formulas and ideal ratios are given for each type of financial ratio.
Absorption, Amalgamation, Reconstruction, Purchase Consideration
1. Absorption is a form of merger where there is a combination of two or more companies into an 'existing company'.
2. Features - One or more companies are liquidated, Generally, larger company purchase the business of smaller company.
3. Objectives - To have control over the market, To eliminate unnecessary competition, To get benefits of large scale operations.
4. Advantages - Expansion, Faster growth, Increased efficiency.
5. Reconstruction - Internal reconstruction is a method in which the reconstruction is undertaken without winding up the company and forming a new one.
External reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities.
6. Purchase Consideration - It is price payable by transferee company to transferor company by taking over the business of transferor company.
7. Amalgamation - When two or more different companies join to become one, the process is called Amalgamation.
Valuation of shares
The document discusses various methods for valuing shares, including net asset value, dividend yield, earnings capitalization, and average methods. It outlines factors to consider under each method such as expected dividends, earnings rates, assets and liabilities. The purpose of share valuation is discussed for scenarios like mergers, reconstructions, and determining values for gifts or inheritance.
AS 14 - Accounting for Amalgamation
Hi friends,
It may be usefull for understanding the AS 14 and if any changes or clarifications required contact with email ID given belove - venki143b@gmail.com
Thanks & Regards
VENKANNA SETTY
5.capital and revenue
Capital and revenue expenditures and receipts must be distinguished to determine which items appear in which financial statements. Capital items appear on the balance sheet, while revenue items appear on the profit and loss account. This distinction is also important for determining net profit, which equals revenue receipts minus revenue expenses. Capital receipts include contributions of capital and loans, while revenue receipts are generated from a firm's regular activities like sales. Capital expenditures acquire or improve long-term assets, increasing earning capacity, while revenue expenditures maintain assets and earnings over a single accounting period.
Leverages
Leverage refers to using debt, borrowed money, or derivative instruments to amplify gains and losses from investments or business operations. There are two types of leverage: operating leverage, which is the use of fixed operating costs, and financial leverage, which is the use of fixed financing costs. The document defines various leverage metrics such as degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined leverage (DCL) which measure how changes in sales, operating income, and earnings per share are amplified through the use of leverage.
Underwriting
The document discusses underwriting, which refers to an agreement where underwriters guarantee to purchase any shares or securities not subscribed to by the public from a company's public offering. It provides context around why underwriting is needed when a company conducts an initial public offering to reduce uncertainty if the public does not fully subscribe to the offering. It also defines underwriters as those who guarantee subscriptions and are responsible for purchasing unsold shares, distinguishing them from brokers who do not take responsibility. The document outlines different types of underwriting agreements, underwriter roles and responsibilities, and SEBI guidelines regulating underwriters in India.
Hire Purchase
Hire purchase is a transaction where goods are purchased through installment payments, with ownership transferring upon final payment. Some key points:
- The buyer receives immediate possession but not ownership of the goods, paying a down payment (typically 20%) and installments that include interest.
- If installments are missed, the seller can repossess the goods. Ownership fully transfers after the last installment is paid.
- It allows consumers to spread costs over time while purchasing goods. However, it offers less tax benefits than leasing and the buyer assumes more risk if installments are missed.
Reconstruction of Companies
Reconstruction is a process where a company reorganizes its legal, operational, ownership and other structures. It involves transferring a company's business to a new company, with the old company being liquidated. Shareholders of the old company receive equivalent shares in the new company. Reconstruction is required when a company has losses for many years and its financial statements do not accurately reflect its position. There are two types of reconstruction - external, where a new company purchases the business of the old company, and internal, which involves reorganizing the company's capital structure through steps like reducing share capital to write off losses. Internal reconstruction methods include altering share capital, varying shareholder rights, and reducing share capital through a special resolution.
Prefrence Shares
Preference shares are shares that have preferential rights to dividends and repayment of capital compared to common shares. There are several types of preference shares: cumulative vs non-cumulative, participating vs non-participating, convertible vs non-convertible, and redeemable vs non-redeemable. Preference shares provide benefits like helping companies raise long-term capital and guaranteeing fixed returns, but also have drawbacks like lack of trading and lower returns.
Issue of Shares
The document discusses key differences between private and public companies. It states that private companies have restrictions on the number of members and cannot invite the public to subscribe to its shares, while public companies can have an unlimited number of members and can invite public subscription. Additionally, private companies have restrictions on the transfer of shares while public companies do not.
Goodwill & its valuation
under this what do you mean by goodwill and what are the methods of goodwill , how to measure and why we need to measure?
Redemption of preference share
The document discusses various types of preference shares such as cumulative, non-cumulative, redeemable, non-redeemable, convertible, and participating shares. It also covers the accounting treatment for redeeming preference shares, including transferring profits to a capital redemption reserve equal to the nominal value of shares redeemed. The capital redemption reserve can be used to issue bonus shares. Securities premium may be used to write off any premium paid to redeem preference shares.
Share capital
The document defines and explains different types of share capital that a company may have:
Authorized capital is the maximum capital allowed by the company's Memorandum of Association. Issued capital is the shares offered to the public. Called-up capital is the issued capital that shareholders are required to pay. Paid-up capital is the amount actually paid by shareholders, while uncalled capital is the remaining amount that can be called later. Reserve capital refers to the portion of uncalled capital that can only be called in the event of winding up.
Dividend Types
dividend types,shareholding,finance management,dividend per share,cash dividend,scrip dividend,stock dividend,property dividend.
Vouching of subsidiary books
Vouching involves verifying book entries against source documents like invoices and receipts. When vouching purchase books, checks include examining invoices for supplier name, goods received, and approval. Purchase return books are vouched by checking debit notes and goods records. For sales books, checks involve verifying invoices, order books, dispatch records, and asset sales. Sales return books are vouched by examining credit notes and goods received records to validate returned item details and postings.
Accounts of insurance companies
Regulation of the insurance industry in India is governed by the Insurance Act of 1938, the IRDA Act of 1999, and the Insurance Amendment Act of 2002. The IRDA has prescribed accounting formats and standards that insurance companies must follow.
There are two main types of insurance business - life insurance and general insurance. Financial statements for both include a revenue account, profit and loss account, and balance sheet. The revenue account shows incomes and expenses, the profit and loss account shows profits appropriated to shareholders, and the balance sheet records assets and liabilities. Additionally, life insurance companies must prepare a receipts and payments account and segmental reporting.
ValuationofGoodwill(Krish Dhall).pptx
This document discusses different methods for valuing goodwill, which is the value of a business beyond its tangible assets. It defines goodwill and lists factors that affect its valuation. The key methods covered are:
1. Simple average profit method, which calculates goodwill as the average profit over several years multiplied by the number of purchase years.
2. Super profit method, which determines goodwill based on "super profits" above a normal rate of return on capital employed.
3. Weighted average profit method, a modified version of the simple average method that weights different years' profits.
4. Capitalization methods, which calculate goodwill as average or super profits divided by a normal rate of return
Goodwill in partnership accountiing
- Goodwill is an intangible asset that represents the value of a business's name, reputation and customer loyalty. It enables a business to earn more profits.
- Goodwill can be calculated using different methods such as average profits, weighted average profits, super profits and capitalization of super profits.
- Several examples are provided to demonstrate calculating goodwill values based on factors like capital employed, normal rate of return, profits over recent years using different valuation methods.
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What's hot
Admission of a partner
The document discusses the process and accounting treatment for admitting a new partner to an existing partnership firm. Key points include:
- A new partner joins the firm and agrees to contribute capital and/or pay premium for their share of goodwill.
- Accounting adjustments are needed such as revising profit sharing ratios, calculating amounts old partners sacrifice to the new partner, and revaluing assets/liabilities.
- Goodwill can be treated via the premium, revaluation, or memorandum revaluation methods which involve debiting/crediting partner capital accounts.
- Other adjustments include redistributing reserves to old partners, adjusting total partner capital based on the new profit sharing ratio.
Redemption of preference share
Preference shares represent partial ownership in a company and carry preferential rights to dividends and assets. Preference shareholders receive dividends first before common shareholders and do not have voting rights. Preference shares can be redeemed either through company profits, issuing new shares, or a combination. When redeemed through profits, an equivalent amount must be transferred to a capital redemption reserve account.
Valuation of shares and valuation of goodwill
This document discusses methods for valuing goodwill and shares. It defines goodwill as a company's reputation and brand value that allows it to earn above-average profits. Methods for valuing goodwill described include the average profit method, super profit method, capitalization of profit method, and annuity method. These methods calculate goodwill based on adjusting a company's historical profits. The document also defines shares and discusses methods for valuing shares not publicly traded, including the net asset method, yield method, and earning capacity method. The net asset method values shares based on a company's net assets, the yield method based on expected dividend returns, and earning capacity method based on rate of profits earned.
Ratio Analysis
The document discusses various types of ratios used in ratio analysis for evaluating the financial performance and position of a business. It provides definitions and interpretations for liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and proprietary ratio, activity ratios like stock turnover ratio and debtor turnover ratio, and profitability ratios like gross profit ratio, net profit ratio, and return on capital employed. Formulas and ideal ratios are given for each type of financial ratio.
Absorption, Amalgamation, Reconstruction, Purchase Consideration
1. Absorption is a form of merger where there is a combination of two or more companies into an 'existing company'.
2. Features - One or more companies are liquidated, Generally, larger company purchase the business of smaller company.
3. Objectives - To have control over the market, To eliminate unnecessary competition, To get benefits of large scale operations.
4. Advantages - Expansion, Faster growth, Increased efficiency.
5. Reconstruction - Internal reconstruction is a method in which the reconstruction is undertaken without winding up the company and forming a new one.
External reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities.
6. Purchase Consideration - It is price payable by transferee company to transferor company by taking over the business of transferor company.
7. Amalgamation - When two or more different companies join to become one, the process is called Amalgamation.
Valuation of shares
The document discusses various methods for valuing shares, including net asset value, dividend yield, earnings capitalization, and average methods. It outlines factors to consider under each method such as expected dividends, earnings rates, assets and liabilities. The purpose of share valuation is discussed for scenarios like mergers, reconstructions, and determining values for gifts or inheritance.
AS 14 - Accounting for Amalgamation
Hi friends,
It may be usefull for understanding the AS 14 and if any changes or clarifications required contact with email ID given belove - venki143b@gmail.com
Thanks & Regards
VENKANNA SETTY
5.capital and revenue
Capital and revenue expenditures and receipts must be distinguished to determine which items appear in which financial statements. Capital items appear on the balance sheet, while revenue items appear on the profit and loss account. This distinction is also important for determining net profit, which equals revenue receipts minus revenue expenses. Capital receipts include contributions of capital and loans, while revenue receipts are generated from a firm's regular activities like sales. Capital expenditures acquire or improve long-term assets, increasing earning capacity, while revenue expenditures maintain assets and earnings over a single accounting period.
Leverages
Leverage refers to using debt, borrowed money, or derivative instruments to amplify gains and losses from investments or business operations. There are two types of leverage: operating leverage, which is the use of fixed operating costs, and financial leverage, which is the use of fixed financing costs. The document defines various leverage metrics such as degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined leverage (DCL) which measure how changes in sales, operating income, and earnings per share are amplified through the use of leverage.
Underwriting
The document discusses underwriting, which refers to an agreement where underwriters guarantee to purchase any shares or securities not subscribed to by the public from a company's public offering. It provides context around why underwriting is needed when a company conducts an initial public offering to reduce uncertainty if the public does not fully subscribe to the offering. It also defines underwriters as those who guarantee subscriptions and are responsible for purchasing unsold shares, distinguishing them from brokers who do not take responsibility. The document outlines different types of underwriting agreements, underwriter roles and responsibilities, and SEBI guidelines regulating underwriters in India.
Hire Purchase
Hire purchase is a transaction where goods are purchased through installment payments, with ownership transferring upon final payment. Some key points:
- The buyer receives immediate possession but not ownership of the goods, paying a down payment (typically 20%) and installments that include interest.
- If installments are missed, the seller can repossess the goods. Ownership fully transfers after the last installment is paid.
- It allows consumers to spread costs over time while purchasing goods. However, it offers less tax benefits than leasing and the buyer assumes more risk if installments are missed.
Reconstruction of Companies
Reconstruction is a process where a company reorganizes its legal, operational, ownership and other structures. It involves transferring a company's business to a new company, with the old company being liquidated. Shareholders of the old company receive equivalent shares in the new company. Reconstruction is required when a company has losses for many years and its financial statements do not accurately reflect its position. There are two types of reconstruction - external, where a new company purchases the business of the old company, and internal, which involves reorganizing the company's capital structure through steps like reducing share capital to write off losses. Internal reconstruction methods include altering share capital, varying shareholder rights, and reducing share capital through a special resolution.
Prefrence Shares
Preference shares are shares that have preferential rights to dividends and repayment of capital compared to common shares. There are several types of preference shares: cumulative vs non-cumulative, participating vs non-participating, convertible vs non-convertible, and redeemable vs non-redeemable. Preference shares provide benefits like helping companies raise long-term capital and guaranteeing fixed returns, but also have drawbacks like lack of trading and lower returns.
Issue of Shares
The document discusses key differences between private and public companies. It states that private companies have restrictions on the number of members and cannot invite the public to subscribe to its shares, while public companies can have an unlimited number of members and can invite public subscription. Additionally, private companies have restrictions on the transfer of shares while public companies do not.
Goodwill & its valuation
under this what do you mean by goodwill and what are the methods of goodwill , how to measure and why we need to measure?
Redemption of preference share
The document discusses various types of preference shares such as cumulative, non-cumulative, redeemable, non-redeemable, convertible, and participating shares. It also covers the accounting treatment for redeeming preference shares, including transferring profits to a capital redemption reserve equal to the nominal value of shares redeemed. The capital redemption reserve can be used to issue bonus shares. Securities premium may be used to write off any premium paid to redeem preference shares.
Share capital
The document defines and explains different types of share capital that a company may have:
Authorized capital is the maximum capital allowed by the company's Memorandum of Association. Issued capital is the shares offered to the public. Called-up capital is the issued capital that shareholders are required to pay. Paid-up capital is the amount actually paid by shareholders, while uncalled capital is the remaining amount that can be called later. Reserve capital refers to the portion of uncalled capital that can only be called in the event of winding up.
Dividend Types
dividend types,shareholding,finance management,dividend per share,cash dividend,scrip dividend,stock dividend,property dividend.
Vouching of subsidiary books
Vouching involves verifying book entries against source documents like invoices and receipts. When vouching purchase books, checks include examining invoices for supplier name, goods received, and approval. Purchase return books are vouched by checking debit notes and goods records. For sales books, checks involve verifying invoices, order books, dispatch records, and asset sales. Sales return books are vouched by examining credit notes and goods received records to validate returned item details and postings.
Accounts of insurance companies
Regulation of the insurance industry in India is governed by the Insurance Act of 1938, the IRDA Act of 1999, and the Insurance Amendment Act of 2002. The IRDA has prescribed accounting formats and standards that insurance companies must follow.
There are two main types of insurance business - life insurance and general insurance. Financial statements for both include a revenue account, profit and loss account, and balance sheet. The revenue account shows incomes and expenses, the profit and loss account shows profits appropriated to shareholders, and the balance sheet records assets and liabilities. Additionally, life insurance companies must prepare a receipts and payments account and segmental reporting.
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Absorption, Amalgamation, Reconstruction, Purchase Consideration
Absorption, Amalgamation, Reconstruction, Purchase Consideration
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ValuationofGoodwill(Krish Dhall).pptx
This document discusses different methods for valuing goodwill, which is the value of a business beyond its tangible assets. It defines goodwill and lists factors that affect its valuation. The key methods covered are:
1. Simple average profit method, which calculates goodwill as the average profit over several years multiplied by the number of purchase years.
2. Super profit method, which determines goodwill based on "super profits" above a normal rate of return on capital employed.
3. Weighted average profit method, a modified version of the simple average method that weights different years' profits.
4. Capitalization methods, which calculate goodwill as average or super profits divided by a normal rate of return
Goodwill in partnership accountiing
- Goodwill is an intangible asset that represents the value of a business's name, reputation and customer loyalty. It enables a business to earn more profits.
- Goodwill can be calculated using different methods such as average profits, weighted average profits, super profits and capitalization of super profits.
- Several examples are provided to demonstrate calculating goodwill values based on factors like capital employed, normal rate of return, profits over recent years using different valuation methods.
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This document discusses methods for valuing goodwill, an intangible asset representing a business's reputation and future earning potential. It describes two methods: the average profit method and super profit method. The average profit method calculates goodwill based on the average profits of past years. It involves determining total profits, calculating the average profit, adjusting for any profit items, and multiplying the adjusted average profit by the number of purchase years. The super profit method calculates goodwill based on any extra "super profits" above what similar businesses earn.
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{Goodwill may be described as the aggregate of those intangible attributes of a business which contributes to its superior earning capacity over a normal return on investment}
{The share capital is the most important requirement of a business. It is divided into a ‘number of indivisible units of a fixed amount. These units are known as ‘shares’. }
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This document defines goodwill and discusses factors that affect goodwill valuation. It provides three methods to calculate goodwill value: average profits method, super profits method, and weighted average profits method. Goodwill represents a company's reputation and value in the business world. It arises when the purchase price of a company exceeds the fair value of its identifiable net assets. Goodwill is an intangible asset that is amortized over a period of years, usually following GAAP and IAS standards of a straight-line method over 20 years. Examples are provided to demonstrate calculating goodwill using the different methods.
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2) The accounting cycle includes preparing financial statements and notes, and the closing process of closing revenue, expense, and dividend accounts to retained earnings.
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ratioanalysis-150212125459-conversion-gate01 (1).pdf
Ratio analysis involves calculating and comparing various financial ratios to evaluate a company's profitability, liquidity, asset use efficiency, and financial stability. Key ratios include return on investment, return on equity, debt-to-equity, and current ratio. Calculating ratios from multiple periods or against industry benchmarks provides insights into a company's performance over time and relative to its peers.
Ratio analysis
Ratio analysis involves calculating and comparing various financial ratios to evaluate a company's profitability, liquidity, asset use efficiency, and financial stability. Key ratios include return on investment, return on equity, debt-to-equity, and current ratio. Calculating ratios from multiple periods or against industry benchmarks provides insights into a company's performance over time and relative to its peers.
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Theory Base of Accounting [Autosaved].pptx
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This document discusses steps for estimating cash flows for DCF valuation, including:
1. Estimating current earnings and considering capital expenditures, depreciation, and working capital needs for future growth.
2. Measuring cash flows to the firm as EBIT(1-tax rate) - (Capex - Depreciation) - Change in working capital.
3. Updating earnings from financial statements and correcting for accounting treatments like operating leases and R&D expenses.
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Valuation of goodwill Methods
- 1. Amity College of Commerce & Finance Name: Ashutosh Singh Couse: Bcom(h) Sem: IV Endrollment No: A35904616016
- 2. Topics to Be Covered • Valuation of goodwill 1. Average Profit Method 2. Calculation of super profit method 3. Capitalization method
- 3. Meaning of goodwill: Goodwill shows the value of a firm in terms of reputation. If a company has a brand that has a certain reputation and status in the market, this can be measured to have a lesser or greater value. This value is called goodwill. Calculation of goodwill Average profit method In this method goodwill is calculated by simply adding the total profit of last years divided by the no. of year. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑠𝑢𝑚 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡 𝑁𝑜. 𝑜𝑓 𝑦𝑒𝑎𝑟 𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑜𝑓𝑖𝑡 ∗ 𝑁𝑜. 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑜𝑓 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒
- 4. Valuation of goodwill Average Profit Method Simple Average Method Weighted Average Method Super Profit Method Year of purchase of super profit Sliding Scale Method Capitalization of super profit Annuity Method Capitalization Method
- 5. A Ltd agreed to buy the business of B Ltd. For that purpose Goodwill is to be valued at three years purchase of Average Profits of last five years. The profits of B Ltd. for the last five years are: Year Profit/Loss 2005 10,000,000 2006 12,250,000 2007 7,450,000 2008 2,450,000 (Profit) 2009 12,400,000 Following additional information is available: 1. In the year 2008 the company suffered a loss of 1,000,500 due to fire in the factory. 2. In the year 2009 the company earned an income from investments outside the business 4,500,250.
- 6. Weighted Average Method 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑒𝑡ℎ𝑜𝑑 = 𝑊1 𝑃1 + 𝑊2 𝑃2 + 𝑊3 𝑃3 … … + 𝑊𝑛 𝑃𝑛 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 Value of Goodwill = Weighted Average Profit x Years Purchase XYZ Co. Ltd. intends to purchase the business of ABC Co. Ltd. Goodwill for this purpose is agreed to be valued at 3 years’ purchase of the weighted average profits of the past four years. Year Profit Loss 1998 30900 1999 45400 2000 35700 2001 48,000
- 7. Super profit method Year of Purchase of super profit Steps for calculating Goodwill under this method are given below: i) Goodwill = Super Profits x No. of years purchased ii) Super Profits = Actual Profits – Normal Profits iii) Normal Profits = Capital Invested X Normal rate of return The capital employed as shown by the books of ABC Ltd is $ 50,000,000. And the normal rate of return is 10 %. Goodwill is to be calculated on the basis of 3 years puchase of super profits of the last four years. Profits for the last four years are: Year Profit/Loss 2005 10,000,000 2006 12,250,000 2007 7,450,000 2008 5,400,000
- 8. Sliding-Scale Valuation of Super Profit It is based on the logic that the greater is the amount of super profits, the more difficult it is to maintain it. Higher profit will naturally attract competition and soon the firm’s ability to make super profits is curtailed. Calculate goodwill with sliding scale method. If super profit is 12,000. For 3 years.
- 9. Capitalisation of Super Profits: 𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙 = 𝑆𝑢𝑝𝑒𝑟 𝑃𝑟𝑜𝑓𝑖𝑡 𝑁𝑜𝑟𝑚𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 For example ABC Ltd earns a profit of $ 50,000 by employing a capital of $ 200,000, The normal rate of return of a firm is 20%. To calculate Goodwill:
- 10. Annuity Method Step 1 : Calculate Average Profit Step 2 : Calculate Super Profit Step 3 : Multiply Super Profit with annuity factor The net profit of a company after providing for taxation for the past five years is: Year Profit/Loss 2009 40,000 2010 50,000 2011 30,000 2012 70,000 2013 80,000 The net tangible assets in the business are Rs. 4, 00,000 on which the normal rate of return is expected to be 10%. It is also expected that the company will be able to maintain its super profits for next five years. Calculate the value of goodwill of the business on the basis of an annuity of super profits, taking present value of an annuity of Rs. 1 for five years at 10% interest is Rs. 3.78.
- 11. Capitalisation Method: I. Net Tangible Assets = Total Tangible Assets – Current Liabilities II. Capitalised Value of Profit = Profit (Adjusted)/Normal Rate of Return Value of Goodwill = Capitalised Value of Profit – Net Tangible Assets A firm earns $40,000 as its average profits. The normal rate of rteturn is 10%. Total assets of the firm are $1,000,000 and its total external liabilities are $ 500,000. To calculate the amount of goodwill.