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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?
Most Upvoted Answer
Weighted average method of calculating goodwill should be followed whe...
Weighted Average Method of Calculating Goodwill
The weighted average method of calculating goodwill should be followed when profits are uneven or have a changing trend. This method takes into account the different profit levels over a period of time and provides a more accurate representation of the company's overall performance.
Reasons to use the weighted average method:
- Uneven profits: If the profits of a company vary significantly from year to year, using the weighted average method helps to smooth out the fluctuations and provide a more stable measure of goodwill.
- Increasing trend: When profits show an increasing trend, the weighted average method is useful in capturing the growth rate and reflecting the company's potential for future earnings.
- Decreasing trend: Similarly, when profits have a decreasing trend, the weighted average method considers the decline in performance and adjusts the goodwill calculation accordingly.
Advantages of using the weighted average method:
- Accuracy: This method provides a more accurate representation of the company's overall performance by taking into account the varying profit levels over time.
- Stability: By smoothing out fluctuations in profits, the weighted average method provides a more stable measure of goodwill, which can be useful for decision-making and financial analysis.
- Predictive value: When profits show a trend, the weighted average method helps to capture and reflect the company's potential for future earnings, making it a valuable tool for forecasting and planning.
In conclusion, the weighted average method of calculating goodwill should be followed when profits are uneven or have a changing trend. This method provides a more accurate and stable measure of the company's performance and takes into account the potential for future earnings.
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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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