Which of the following best describes the asset-based approach for valuing corporations in relation to the fundamental accounting equation?

• A. It values a company based on projected future cash flows discounted to present value.
• B. It values a company based on its market capitalization.
• C. It values a company based on the difference between total assets and total liabilities (\(\text{Assets} - \text{Liabilities}\)).
• D. It values a company based on its historical net income.

Answer: (C)

Verified step by step guidance

1. Step 1: Begin by recalling the fundamental accounting equation, which is expressed as: \( \text{Assets} = \text{Liabilities} + \text{Equity} \). This equation forms the basis for understanding the asset-based approach.
2. Step 2: Understand that the asset-based approach values a company by calculating the difference between its total assets and total liabilities. This difference represents the company's equity or net worth.
3. Step 3: Recognize that this method focuses on the balance sheet components rather than future projections, market capitalization, or historical net income. It is a snapshot of the company's financial position at a specific point in time.
4. Step 4: To apply this approach, identify the total assets and total liabilities from the company's financial statements. Use the formula: \( \text{Equity} = \text{Assets} - \text{Liabilities} \).
5. Step 5: Note that this approach is particularly useful for valuing companies with significant tangible assets or in liquidation scenarios, as it provides a clear measure of the company's net worth based on its current financial position.