State the order of steps required for valuation of goodwill using wei…

State the order of steps required for valuation of goodwill using weighted Average Profit method.

A. Assign weights to each year's profit/loss
B. Multiply weighted average Profit with number of years purchase
C. Find goodwill
D. Calculate adjusted profit
E. Calculate weighted average profit

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → D, A, E, B, C

Under the weighted average profit method, recent years get higher weights, and the steps follow the working of the calculation.

D. Calculate adjusted profit — each year's profit is first corrected for abnormal items, so the figures are fit to be averaged.

A. Assign weights to each year's profit/loss — each adjusted profit is multiplied by its weight (1, 2, 3 …).

E. Calculate weighted average profit — total of the products ÷ total of the weights.

B. Multiply weighted average Profit with number of years purchase — the agreed years’ purchase is applied.

C. Find goodwill — the product is the value of goodwill.

NCERT (2026-27 edition):
Methods of Valuation of Goodwill – “… The above illustration is based on simple average. Sometimes, if there exists an increasing on decreasing trend, it is considered to be better to give a higher weightage to the profits to the recent years than those of the earlier years. Hence, it is a advisable to work out weighted average based on specified weights like 1, 2, 3, 4 for respective year’s profit. However, weighted average should be used only if specified. (See illustrations 10 and 11).”

NCERT (2026-27 edition):
Methods of Valuation of Goodwill – “… Under this method, the goodwill is valued at agreed number of ‘years’ purchase of the average profits of the past few years. It is based on the assumption that a new business will not be able to earn any profits during the first few years of its operations. Hence, the person who purchases a running business must pay in the form of goodwill a sum which is equal to the profits he is likely to receive for the first few years. The goodwill, therefore, should be calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue.”