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The sliding scale method for valuing goodwill involves:
- a)Fixed multiplication of super-profit.
- b)Varying multiplication of super-profit.
- c)Calculating future maintainable profit.
- d)Using the average profit of past years.
Correct answer is option 'B'. Can you explain this answer?
Verified Answer
The sliding scale method for valuing goodwill involves:a)Fixed multipl...
The sliding scale method adjusts the multiplication of super-profit based on different ranges of profit.
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The sliding scale method for valuing goodwill involves:a)Fixed multipl...
Understanding the Sliding Scale Method for Valuing Goodwill
The sliding scale method for valuing goodwill is a nuanced approach that accounts for varying levels of profitability. Here’s an explanation of why option 'B' is the correct answer.
What is Goodwill?
Goodwill represents the intangible value of a business, often arising from its brand reputation, customer relationships, and unique operational capabilities.
Super-Profit Concept
- *Super-profit* refers to profits that exceed the normal expected returns on investment.
- It is calculated by comparing the business's actual profits to a benchmark profit level, often determined by industry standards.
Fixed vs. Varying Multiplication
- Fixed Multiplication (Option A) implies using a constant multiplier for super-profits, which does not reflect the dynamic nature of business performance.
- Varying Multiplication (Option B) allows for different multipliers based on the business’s performance, market conditions, and growth potential. This flexibility is crucial as it recognizes that goodwill can fluctuate significantly with changes in profitability.
Future Maintainable Profit vs. Average Profit
- Calculating Future Maintainable Profit (Option C) focuses on estimating future earnings but does not directly link to the sliding scale method.
- Using Average Profit of Past Years (Option D) provides historical context but lacks the adaptability needed in a sliding scale approach.
Conclusion
The sliding scale method is favored for its ability to adapt to varying levels of super-profits, making option 'B' the correct choice. By allowing for a varying multiplication of super-profits, this method offers a more accurate representation of a business's goodwill value.
The sliding scale method for valuing goodwill is a nuanced approach that accounts for varying levels of profitability. Here’s an explanation of why option 'B' is the correct answer.
What is Goodwill?
Goodwill represents the intangible value of a business, often arising from its brand reputation, customer relationships, and unique operational capabilities.
Super-Profit Concept
- *Super-profit* refers to profits that exceed the normal expected returns on investment.
- It is calculated by comparing the business's actual profits to a benchmark profit level, often determined by industry standards.
Fixed vs. Varying Multiplication
- Fixed Multiplication (Option A) implies using a constant multiplier for super-profits, which does not reflect the dynamic nature of business performance.
- Varying Multiplication (Option B) allows for different multipliers based on the business’s performance, market conditions, and growth potential. This flexibility is crucial as it recognizes that goodwill can fluctuate significantly with changes in profitability.
Future Maintainable Profit vs. Average Profit
- Calculating Future Maintainable Profit (Option C) focuses on estimating future earnings but does not directly link to the sliding scale method.
- Using Average Profit of Past Years (Option D) provides historical context but lacks the adaptability needed in a sliding scale approach.
Conclusion
The sliding scale method is favored for its ability to adapt to varying levels of super-profits, making option 'B' the correct choice. By allowing for a varying multiplication of super-profits, this method offers a more accurate representation of a business's goodwill value.
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The sliding scale method for valuing goodwill involves:a)Fixed multiplication of super-profit.b)Varying multiplication of super-profit.c)Calculating future maintainable profit.d)Using the average profit of past years.Correct answer is option 'B'. Can you explain this answer?
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The sliding scale method for valuing goodwill involves:a)Fixed multiplication of super-profit.b)Varying multiplication of super-profit.c)Calculating future maintainable profit.d)Using the average profit of past years.Correct answer is option 'B'. Can you explain this answer? for B Com 2025 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about The sliding scale method for valuing goodwill involves:a)Fixed multiplication of super-profit.b)Varying multiplication of super-profit.c)Calculating future maintainable profit.d)Using the average profit of past years.Correct answer is option 'B'. Can you explain this answer? covers all topics & solutions for B Com 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for The sliding scale method for valuing goodwill involves:a)Fixed multiplication of super-profit.b)Varying multiplication of super-profit.c)Calculating future maintainable profit.d)Using the average profit of past years.Correct answer is option 'B'. Can you explain this answer?.
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