Question

Weighted average method of calculating goodwill is used when

• A. Profit is equal
• B. Profit has increasing trend
• C. Profit has decreasing trend
• D. Both (A) and (B)

Hint:

Weighting favours the most recent, most representative years — relevant only when profits are trending up.

Answer 1

The Correct Option is B

Step 1: Compare the two averaging methods:
Simple average method gives every year's profit the same weight and suits a firm whose profits stay roughly equal, showing no real trend.

Step 2: Reason about weighted averaging:
Weighted average deliberately gives more weight to the most recent year(s), which is meaningful only when profits are genuinely rising — the latest, higher figures then more fairly represent future earning capacity than older, lower figures.

Final Answer:
Weighted average method is used when profit has an increasing trend.