goodwill

(noun)

Goodwill is an accounting concept meaning the value of an asset owned that is intangible but has a quantifiable "prudent value" in a business for example a reputation the firm enjoyed with its clients.

Related Terms

  • debt to total assets ratio

Examples of goodwill in the following topics:

  • Limitations of the Balance Sheet

    • Intangible assets like goodwill are shown in the balance sheet at imaginary figures, which may bear no relationship to the market value.
    • Therefore, there is a disconnect–goodwill from acquisitions can be booked, since it is derived from a market or purchase valuation.
  • Market/Book Ratio

    • Technically, P/B can be calculated either including or excluding intangible assets and goodwill.
    • When intangible assets and goodwill are excluded, the ratio is often specified to be "price to tangible book value" or "price to tangible book".
  • Total Debt to Total Assets

    • It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').
  • Uses of the Income Statement

    • The intangible asset goodwill is not subject to amortization but must be tested for impairment once a year; any reductions in value are reported as an impairment loss on the income statement.
  • Understanding Future Stock Value

    • Numbers are usually reported as a GAAP EPS number (which means it is computed using mutually agreed upon accounting rules) and a Pro Forma EPS figure (income is adjusted to exclude any one time items as well as some non-cash items like amortization of goodwill or stock option expenses).
    • However, because of very common irregularities in balance sheets (due to things like goodwill, write-offs, discontinuations, etc. ) this ratio is not always a good indicator of the company's potential.
  • Assets

    • The intangible asset "goodwill" reflects the difference between the firm's net assets and its market value; the amount is first recorded at time of acquisition.
    • Goodwill must be tested for impairment on an annual basis and adjusted if the firm's market value has changed.
  • Total Assets Turnover Ratio

    • Examples of intangible assets are goodwill, copyrights, trademarks, patents, computer programs, and financial assets, including such items as accounts receivable, bonds and stocks.
  • Liabilities and Equity

    • The assets of an entity includes both tangible and intangible items, such as brand names and reputation or goodwill.
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