Q.The profits of a firm for the last five years were: 2021 – ₹40,000; 2022 – ₹50,000; 2023 – ₹45,000; 2024 – ₹60,000; 2025 – ₹55,000. Goodwill is to be valued at 2 years' purchase of the average profit of the last five years. Calculate the value of goodwill.

Correct option: Goodwill. It is a valuable asset that cannot be seen or touched — it represents the firm's reputation and earning capacity — so it is intangible, unlike stock, cash and furniture which have physical form.

Explanation

An intangible asset is one that has monetary value but no physical existence. Goodwill is the value of a firm's reputation, customer relations and above-normal earning capacity; it cannot be physically touched, so it is classed as intangible. Stock, cash and furniture are all tangible assets with a physical form.

The term for "Average Profit − Normal Profit" is Super Profit — the surplus earning above the normal expected return, used to value goodwill.

A firm earns goodwill only when it earns more than an ordinary business of the same size would. To measure that extra earning:

• Normal Profit = Capital Employed × Normal Rate of Return. It is what any similar business would reasonably expect to earn.
• Average Profit = the average of the firm's actual past profits (adjusted for abnormal items).
• Super Profit = Average Profit − Normal Profit.

If the average profit only equals the normal profit, there is no super profit and hence no goodwill by this method. A positive super profit shows the firm's extra earning capacity, which is then multiplied by an agreed number of years' purchase to arrive at goodwill.

The correct choice is Goodwill — it is the only intangible asset in the list.

An asset is anything of value owned by a business. Assets are broadly of two kinds:

Goodwill is the monetary value of a firm's reputation, customer base and earning capacity above its net tangible assets. It cannot be physically touched, yet it is realisable on sale of the business — so it is classified as an intangible asset.