To develop a standard or benchmark in accounting, firms need to start with which of the following?

• A. The income statement
• B. The trial balance
• C. The fundamental accounting equation: \( \text{Assets} = \text{Liabilities} + \text{Equity} \)
• D. The statement of cash flows

Answer: (C)

Verified step by step guidance

1. Understand the purpose of a benchmark in accounting: A benchmark is used to measure and compare financial performance or position. It serves as a standard for evaluating the firm's financial health.
2. Recognize the importance of the fundamental accounting equation: The equation \( \text{Assets} = \text{Liabilities} + \text{Equity} \) is the foundation of accounting and represents the relationship between a firm's resources, obligations, and ownership interest.
3. Analyze why the fundamental accounting equation is the starting point: This equation ensures that all financial transactions are accurately recorded and balanced, forming the basis for preparing financial statements such as the income statement, trial balance, and statement of cash flows.
4. Connect the fundamental accounting equation to financial statements: The equation is reflected in the balance sheet, which provides a snapshot of the firm's financial position. It also influences other financial statements by ensuring consistency and accuracy in reporting.
5. Apply the fundamental accounting equation to develop benchmarks: Firms use this equation to establish standards for financial ratios, performance metrics, and comparisons across periods or with industry peers.