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Q&A for How to Calculate Goodwill
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QuestionFor a new small business, with a loss for the first year, would there be a value for the goodwill then, and how is this calculated?Darron Kendrick is an Adjunct Professor of Accounting and Law at the University of North Georgia. He received his Masters degree in tax law from the Thomas Jefferson School of Law in 2012, and his CPA from the Alabama State Board of Public Accountancy in 1984.Unless a new business with an initial year loss is in a hot market, such as technology, or has some type of market edge or celebrity appeal, there would be little chance of finding goodwill.
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QuestionHow then does a startup calculate goodwill as a way of knowing the value of the startup?Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin.There is no goodwill in a start-up balance sheet, since there was no cost to acquire the intangible asset. Goodwill exists *only* when a buyer pays more for an asset than the asset is worth, not before.
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QuestionIf the accounts of the firm are not real, than what has to done to arrive at Goodwill?Darron Kendrick is an Adjunct Professor of Accounting and Law at the University of North Georgia. He received his Masters degree in tax law from the Thomas Jefferson School of Law in 2012, and his CPA from the Alabama State Board of Public Accountancy in 1984.There would be no goodwill in a situation based upon fraudulent information. At least not after the fraud was discovered.
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QuestionI would like to clarify how the annual profit is established when thinking of selling a business. Does it, for example, include the director's drawings/salary?Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin.Buyers and sellers define profits as it best fits their purpose. For example, a seller would try to convince a buyer that owner and directors' compensation are discretionary and should be considered part of profits; a buyer might look at an income statement and consider the owner's salary unrealistically low because the new owner would hire someone for more pay. In other words, you can categorize profit on an income statement to your benefit provided that you give full disclosure and the books balance.
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