COMM-3016EL Chapter Notes - Chapter Appendix 12A: Book Value, Cash Flow, Operating Cash Flow

• School: Laurentian
• Department: Commerce and Administration
• Course: COMM-3016EL
• Professor: Jo- Anne Ryan

Document Summary

Determining the fair value of the consideration transferred and of the assets and liabilities acquired is an inexact process, and therefore, so is the calculation of the amount of goodwill. Excess-earnings approach a method used to value goodwill that calculates the normal earnings generated by companies in the same industry. If a company earns a higher rate of return than the industry average, this excess is goodwill. This method follows 4 steps: calculate the average annual normalized earnings that the company is expected to earn in the future. Determining the industry"s average rate of return earned on net assets requires an analysis of companies that are similar to the enterprise being examined . The net assets" fair value not their carrying amount is used to calculate the level of earnings at the industry average rate of return. The ability to generate a higher income indicates that the business has an unidentifiable value that provides this greater earning power.