Practicing Success
What happens to goodwill when a firm earns normal profits? |
It remains constant It decreases It increases It becomes irrelevant |
It becomes irrelevant |
When a firm earns normal profits, goodwill becomes irrelevant. Goodwill is typically associated with a firm's ability to earn excess or super profits, which are profits that go beyond the normal return on investment. Normal profits are considered to be the expected or average level of profitability for a business. In the context of normal profits, there is no significant advantage or value attributed to the firm's reputation, brand recognition, or other intangible factors that contribute to goodwill. Therefore, it becomes irrelevant to assess or consider goodwill in the financial accounts of a firm earning normal profits. |