Sacrifice ratio is used only fora)Distribution of Reserveb)Revaluation...
At the time of admission of a new partner, the main use of sacrificing ratio is to adjust the premium for goodwill brought by a new partner.
Sacrifice ratio is used only fora)Distribution of Reserveb)Revaluation...
Sacrifice ratio is a term used in accounting and finance to measure the cost or impact of a particular action or decision. It is typically used in the context of business valuation and refers to the premium paid for goodwill.
Goodwill is an intangible asset that represents the reputation, brand value, customer loyalty, and other non-physical aspects of a business. When one company acquires another, it may pay a premium over the target company's net asset value in order to capture the intangible value associated with the target company's brand and customer base. This premium is known as the goodwill premium.
Explanation:
The sacrifice ratio is used specifically to calculate the premium for goodwill. The sacrifice ratio represents the ratio of the premium paid for goodwill to the average annual future maintainable earnings of the acquired company. It is calculated by dividing the premium for goodwill by the average annual future maintainable earnings.
The premium for goodwill is the excess amount paid over the net asset value of the acquired company. It is essentially the price paid for intangible assets such as brand value, customer relationships, and market share. The sacrifice ratio helps determine the value of this premium relative to the future earnings potential of the acquired company.
The average annual future maintainable earnings represent the expected future earnings of the acquired company, adjusted for any abnormal or non-recurring items. These earnings are used as a basis for valuing the company and determining the premium for goodwill.
By calculating the sacrifice ratio, the acquirer can assess whether the premium paid for goodwill is justified based on the future earnings potential of the acquired company. If the sacrifice ratio is too high, it may indicate that the premium paid for goodwill is too large relative to the expected future earnings. On the other hand, if the sacrifice ratio is low, it may suggest that the premium paid for goodwill is reasonable in relation to the future earnings potential.
In conclusion, the sacrifice ratio is a measure used to calculate the premium for goodwill when one company acquires another. It helps assess the value of the premium relative to the future earnings potential of the acquired company.