Question

Name the method under which the goodwill is valued at the agreed number of 'years' purchase of the average profits of the past few years?

Options

• Average Profits Method

• Super Profits Method

• Capitalization Method

• None of these

Answer 1

Average Profits Method

Explanation:

This method values goodwill by purchasing the average revenues of the previous few years for an agreed number of "years." It is predicated on the idea that a new firm would not be profitable during its first few years of operation. As a result, a buyer of an operating business must pay a price equal to the profits he is projected to make in the first few years in the form of goodwill. As a result, goodwill should be estimated by multiplying previous average profits by the number of years the predicted profits are expected to accrue.