The 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.

Question

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The statement correctly identifies three conditions where constant ratios cannot be assumed and highlights the use of the forecasted financial statement method as a way to relax the AFN equation's assumption of constant ratios.

The AFN Equation Assumes That the Ratios of Assets and Liabilities