Which of the following statements is correct? A)When we use the AFN formula, we assume that the ratios of assets and liabilities to sales (A*/S₀ and L*/S₀) vary from year to year in a stable, predictable manner. B)Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process. C)For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets. D)When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.

Question

Quizplus · Accepted Answer

Statement B is correct because firms with "lumpy" fixed assets often have periods of excess capacity due to the nature of these assets being purchased in large, discrete quantities. This excess capacity should indeed be considered during financial forecasting to accurately predict when additional investments in fixed assets are necessary.

Which of the Following Statements Is Correct