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Goodwill

In: Business and Management

Submitted By kellyn07
Words 1368
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Goodwill is an intangible asset described differently amongst different professionals in history. Professor Dicksee, author of many different accounting manuals has defined goodwill as “When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts.” Lord Lindley has been quoted of saying “The term goodwill is generally used to denote benefit arising from connections and reputation.” Lord Macnaghten has been quoted of saying “Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force, which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start.”
When a potential buyer is considering whether or not to acquire a company, that buyer may want to calculate the average future income when deciding what purchase price to offer. Goodwill is usually the payment that would be contributed above the future normal expected profits. Expected future income is further known as the normal income, the appropriate rate of return on assets times the fair value of the gross assets of the acquired company. There are six different methods used in the valuation of goodwill of a firm. 1. Average Profit Method calculates goodwill on the basis of the average profit previous years. The average profit is then multiplied by the number of years purchase. In a mathematical equation this would be expressed as follows: Goodwill = Average Profit x Number of Years Purchase. 2. Weighted Average Method is similar to the average profit method but differs by multiplying profit of year as a number, or in this case called a weight in order to come up with the value product and the total of products is...

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