GOODWILL

1. Valuation of Goodwill
PREPARED BY: MEGHA SHARMA
M.COM SEMESTER-II
C.R.N-23
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2. CONTENTS
SLIDE NO. TITLE
3 ACKNOWLEDGEMENT
4 MEANING OF GOODWILL
5 FACTORS AFFECTING VALUATION OF
GOODWILL
6 METHODS OF VALUATION OF GOODWIL
7 SIMPLE AVERAGE PROFIT METHOD
8 SIMPLE AVERAGE PROFIT METHOD (CONT.)
9 ILLUSTRATION 1
10 SOLUTION
11 SUPER PROFIT METHOD
12 ILLUSTRATON 2
13 WEIGHTED AVERAGE PROFIT METHOD
14 CAPITALZATION OF PROFIT METHOD
15 BIBLIOGRAPHY 2

3. ACKNOWLEDGEMENT
I would like to convey my heartfelt gratitude to MRS.
RIMA MITTAL for her tremendous support and
assistance in the completion of my project with the topic
VALUATION OF GOODWILL. I would also like to
thank my parents and friends for the relentless help
they kept providing me throughout the course of this
project. The completion of the project would not have
been possible without their help and insights.
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4. 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.
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5. 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
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6. 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
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7. 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.
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8. • 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.
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9. 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.
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10. 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
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11. 2. Super Profits Method
• Goodwill is calculated on the basis of Super Profit
i.e. the excess of actual profits over the average
profits.
• Formula:-
1. Goodwill = Super Profit * No. of years purchase
2. Super Profit = Average Profits - Normal Profits
3. Normal Profits = Capital Employed * Normal Rate of Return / 100
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12. Illustration No. 2
Average Profit is ₹. 60000, Capital employed is ₹ 500000, NRR is 10%.
Calculate goodwill on the basis of four year’s purchase of the super profit of
last four years.
Solution:
Normal Profit = Capital employed * NRR
= 500000 * 10%
= 50000
Super Profit = Average Profit – Normal Profit
= 60000 - 50000
= 10000
Goodwill = Super Profit * No. of years purchase
= 10000 * 4
= 40000
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13. 3. Weighted Average Profit method
• This method is the modified version of the simple
average profit method. In this method, each year’s
adjusted profits are multiplied with the respective
number of weights in order to calculate the total
product. The total of products is then divided by the
total of weights to calculate the weighted average
profits. Thereafter, the weighted average profits are
multiplied by the number of years of purchase.
• Formula :
• Weighted Average Profits = Total Products o Profits /
Total of Weights
• Goodwill = Weighted Average Profits * No. of years of
purchase
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14. 4. Capitalization of Profit Method
a. Capitalization of Average Profit Method
= Average Profit / NRR * 100
b. Capitalization of Super Profit Method
= Super Profit / NRR * 100
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15. BIBLIOGRAPHY
For successfully completing my presentation, I
have taken help from the following website links:
 WWW.GOOGLE.COM
 WWW.WIKIPEDIA.COM
 YOUTUBE
 GOOGLE IMAGES
 BOOK: CORPORATE FINANCIAL ACCOUNTING BY
DR.KG GUPTA
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