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Which valuation method of goodwill calculates the present value of expected future cash flows generated by the acquired business?

medium MCQ 2 marks Class 12 · Accountancy · Goodwill Nature and Valuation
  1. Cost method
  2. Income method
  3. Market method
  4. Equity method
Answer
Income method

The correct answer is Income method — Answer: Income method.

Step-by-step solution

  1. List the four common valuation methods: Cost, Income, Market, and Equity.
  2. Understand that the Income method uses the discounted value of future cash flows to estimate goodwill.
  3. Recognise that the other methods do not focus on future cash flows: Cost uses purchase price, Market uses comparables, Equity uses book value of equity.
  4. Select the Income method as the correct answer.
  5. Answer: Income method.
Common mistake: Selecting market method instead of income method

Concept tested: Valuation methods of goodwill

Published · How this solution was prepared and checked

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