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If a firm's average profit is consistently higher than its normal profit, what does this indicate?

Answer and explanation

Correct answer: The firm is likely to have goodwill

When a firm consistently earns more than its normal profit, it demonstrates an ability to earn super profit. This additional earning capacity is a major basis of the firm's goodwill. Therefore, option A is correct; higher profit does not mean that the firm's assets are exhausted or that it will close down. Exam tip: profit earned above normal profit is called super profit and is associated with goodwill.

Related tags

GoodwillSuper ProfitPartnership AccountsExtra Earning CapacityPartnership Accounts Basic ConceptsAccountancyClass 12 Mcq

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