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Is goodwill a quality criteria?

C

Craig H.

#11
Charmed said:
Dear Sal:

You fixed the problem and now have earned my goodwill. I tried to read the file yesterday, and could not open it either. I got a message saying it is on a CD ROM etc. and could't open it. I thought, I will wait to see if anyone reports any problems. Looks like others had some problems.

First of all I enjoyed reading it and it was 'good' to know how 'goodwill' can actually be measured. Now, I have a question. In the last paragraph you mention that there are some (in any organization, I assume) who do not generate goodwill. What do we do with such people, if Goodwill = Asking Price - Market Value is taken to be the only reason for the company's existence? Any thoughts Covers?

Charmed :)
Ahh, accounting. Let's see.

First, the "book" value of a particular company can be impacted by many things, not the least of which is depreciation and amortization. These decrease the book value of assets (BV=acquisiton cost-depreciation or amortization). Now, the amount taken as depreciation and/or amortization can vary for a particular asset from organization to organization, and depends upon the schedule used (straight line, accelerated, double declining balance, etc.) Since the book value of the assets is ultimately figured into goodwill, the dep./amort. can (and likely will) have a material effect.

One of the things that many find confusing is the word "goodwill" itself. From an accounting standpoint, "goodwill" has nothing to do with feelings of trust and understanding. A company with a bad reputation can be purchased with a sizable amount of goodwill on the purchasing party's books as a result. It is also possible for a transaction to result in negative goodwill, although I know of no such occurrence.
 
C

Charmed

#12
Negative goodwill

Craig H. said:
Ahh, accounting. Let's see.

It is also possible for a transaction to result in negative goodwill, although I know of no such occurrence.
Dear Craig:

I just wanted some "accountants" to take a stab at this. Here's an example of a "transaction" that comes to my mind that led to negative goodwill. Almost 15 years ago, a videostore owner once charge me a $10 fine for late return. This was a mom and pop operation and also a specialty grocery store. They used to be quite liberal with their late return policy. My wife and I never went back to that store. That was just one "lousy" transaction, a $10 fine, but no repeat business (specialty groceries!) from a good customer after that.

Charmed :) May be :topic:
 
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C

Craig H.

#13
Charmed said:
Dear Craig:

I just wanted some "accountants" to take a stab at this. Here's an example of a "transaction" that comes to my mind that led to negative goodwill. Many years ago, when video rentals first started, we used to rent videos from a store here. They were quite liberal about their late return policies. They never charged us, if we were a day or two late, since we would return the videos and pick up some more.

Anyway, once I was busy and let things slide by as much as a week, may be even close to two weeks. The storeowner got mad with me and gave me a mouthful for being tardy. When I tried to politely remind him about how they had been treating us in the past, he wouldn't budge and insisted on charging a fine (it was more than $10, as far as I can remember).

Anyway, I came home and told my wife about it. She got mad and said she is never going back to that store again. Besides renting videos, this was also a specialty grocery store where my wife used to shop regularly and buy all her specialty groceries. This was more than 15 years ago, at least. I don't think she has ever gone back to that store. She does all her shopping in another store about a mile away. Neither have I. (This competitor had always been there, but somehow we never went there. This storeowner is now a good friend.)

That was just one "lousy" transaction, a $10 fine, but no repeat business from a good customer after that.

Charmed :)

Charmed:

Sure, you had "negative goodwill' (badwill?) with the store, but this also illustrates my point - without a transaction involving a change of ownership of an accounting entity (i.e. corporation, partnership, LLC, etc.) there is NO WAY any goodwill is generated from an accounting standpoint. None, nada.

As far as the books are concerned, your $10 fine was entered (as "other business income" possibly) and that was it. From an accounting standpoint no goodwill was generated or lost.

Again, the ONLY WAY for a company to have an account on the books with a balance and labeled "goodwill" is for the company to have been involved in a merger and/or acquisition of another entity.

Look at it this way. There is no real way for us to put a value on the "goodwill" (in a noinaccounting sense) acquired by a company. That is, until we find someone who is willing to buy the company - not only its assets, which we can fairly easily value - but all of the company. Its name, trademarks, etc. Then we have a problem. There is a difference between the price offered and the book value of the company. THIS is goodwill (in an accounting sense) and is put on the books as such, if and when such a transaction takes place.

Have I muddied things up even further?
 
C

Craig H.

#14
For what it's worth, and I have just barely scratched the surface here, if you are interested in how this accounting mumbo-jumbo can impact you and your company directly, read Goldratt's The Goal, particularly the parts about cost (managerial) accounting. I very highly suggest it.
 
C

Charmed

#15
Craig H. said:
Charmed:

Sure, you had "negative goodwill' (badwill?) with the store, ...Again, the ONLY WAY for a company to have an account on the books with a balance and labeled "goodwill" is for the company to have been involved in a merger and/or acquisition of another entity.

Look at it this way.... There is a difference between the price offered and the book value of the company. THIS is goodwill (in an accounting sense) and is put on the books as such, if and when such a transaction takes place.

Have I muddied things up even further?
Dear Craig:

I not familiar with the details of how "book value" of a company is calculated. I do know that the "market value" of a company is defined as M = NP where P is the price per share and N is the number of shares outstanding. The price per share keeps changing each day as the stock is traded. This depends on many complex factors. Analysts look at many different things to evaluate a stock and the "value" of a company. Profits and revenues are certainly included in this analysis.

What I guess I was trying to say is that the sum total of all "transactions" such the one I described affects the revenues and profits on a daily basis and ultimately the "book" value or the "market" value. If you do not pay attention to these types of daily transactions, you might as well forget that one "BIG" transaction when the company is involved in a merger or acquisition. Rome was not built in a day. Neither is goodwill earned on one day. You did not "muddy" anything. I was just digressing a bit. Have a great weekend. TGIF, almost!

Charmed :) :topic: May be?
 
G

Greg B

#16
sal881vw said:
I was out all day yesterday. I'm working from home and I did open the doc. from my side when I posted it and so I thought that it was ok. The document is in OpenOffice.org 1.0.1 text document. I'll try and fix the problem by saving it to windows 95 format and post it again, do excuse the inconvenience.
Sal,

Please take some time and go to this thread, that I posted last year on 'OpenOffice'. I'd love to know what you think of the product. Many of us had trouble downloading it or are still on dialup which makes it untouchable. I'll give your article a read in the mean time.

http://elsmar.com/Forums/showthread.php?t=7315&highlight=open+office
 

sal881vw

Quite Involved in Discussions
#17
Greg B said:
Sal,

Please take some time and go to this thread, that I posted last year on 'OpenOffice'. I'd love to know what you think of the product. Many of us had trouble downloading it or are still on dialup which makes it untouchable. I'll give your article a read in the mean time.

http://elsmar.com/Forums/showthread.php?t=7315&highlight=open+office
Greg,
I have still not full grasped "OpenOffice" because of some menus differences, but IMHO it is another version of MS Office. We actually got this software for free when I bought our home system, since we had to pay additional for MS Office, it works just as good. One needs to remember to save the work according to the end users system :eek: , which was exactly my mistake.
 
#18
Good writing Sal,:agree1:

To answer the question in the title, Is goodwill a quality criteria? : I'll say yes right away... It is also hard earned and very, very easy to lose.

/Claes
 
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