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Keeping all other factors constant, what is the usual effect of increased competition on a business’s goodwill?

Answer and explanation

Correct answer: Goodwill is likely to decrease

Increased competition may reduce a firm’s super profits and its expected future earning capacity. Since goodwill is associated with the ability to earn profits above the normal level, goodwill generally tends to decrease when competition rises. Option C is incorrect because competition can affect profitability and goodwill, while B and D are exaggerated or conceptually wrong. Exam tip: In questions on factors affecting goodwill, increased competition generally has a negative effect.

Related tags

GoodwillPartnership AccountsCompetitionSuper ProfitsEarning CapacityPartnership Accounts Basic ConceptsAccountancyClass 12 Mcq

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