AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time However, this assumption can be relaxed when we use the forecasted financial statement method Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, and excess capacity.

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The statement is correct, as the AFN equation assumes constant ratios of assets and liabilities to sales, which may not always hold true. The forecasted financial statement method allows for more flexibility in incorporating changes in ratios based on factors such as economies of scale, lumpy assets, and excess capacity.

AFN Equation Assumes That the Ratios of Assets and Liabilities