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Weighted average method of calculating goodwill should be followed when:
- a)Profits are uneven
- b)Profits has increasing trend
- c)Profits has decreasing trend
- d)Either ‘b’ or ‘c’
Correct answer is option 'D'. Can you explain this answer?
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Weighted average method of calculating goodwill should be followed whe...
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- d)Either ‘b’ or ‘c’
Weighted average method of calculating goodwill should be followed when: a)
Profits are uneven. Profits has increasing trend.
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Weighted average method of calculating goodwill should be followed whe...
Reasons for using weighted average method for calculating goodwill:
Profits are uneven:
When profits are uneven, using a weighted average method helps in smoothing out fluctuations in earnings over multiple periods. This method gives more weight to recent profits, reflecting the current performance of the business more accurately.
Profits have increasing trend:
If profits have been increasing over time, using a weighted average method ensures that the goodwill calculation reflects the growth trend. By giving more weight to recent higher profits, the calculation will align with the improving financial performance of the business.
Profits have decreasing trend:
Similarly, if profits have been on a decreasing trend, using a weighted average method will take into account the declining earnings by assigning more weight to the lower recent profits. This helps in capturing the downward trajectory in the calculation of goodwill.
Conclusion:
In conclusion, the weighted average method of calculating goodwill is suitable when profits are uneven or when there is a trend of increasing or decreasing profits. This approach provides a more accurate representation of the business's current financial performance and helps in making informed decisions regarding goodwill valuation.
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Weighted average method of calculating goodwill should be followed when:a)Profits are unevenb)Profits has increasing trendc)Profits has decreasing trendd)Either ‘b’ or ‘c’Correct answer is option 'D'. Can you explain this answer?
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