Q.The following are the profits of a firm in the last five years : 2014 : ₹ 4,000 ; 2015 : ₹ 3,000 ; 2016 : ₹ 5,000 ; 2017 : ₹ 4,500 and 2018 : ₹ 3,500. The average profits of five years is ________.

Under this method, Goodwill = Average Profit of past years × Number of Years' Purchase. The average profit is not simply the arithmetic average of the profits as originally reported — each year's profit must first be adjusted so that only normal, recurring trading profit is included. Abnormal losses (fire, theft, strike) are added back since they will not recur; abnormal gains (profit on sale of an asset) are deducted since they are non-recurring and unrelated to trading; an overvalued or undervalued closing stock is corrected in the year it occurred; an expense that will not recur in future is added back; and interest earned on non-trade investments is deducted, since it does …