Q.A firm's capital employed is ₹5,00,000, the normal rate of return is 10% p.a., and the average profit of the firm is ₹80,000. Calculate the value of goodwill by the Capitalisation of Average Profit Method.

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

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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. …

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: