In what order should pro forma statements be prepared?

The correct order for preparing pro forma statements is to start with the pro forma income statement, followed by the pro forma balance sheet, and concluding with the pro forma cash flow statement. This sequence is logical and follows the flow of financial information through the accounting cycle.

Starting with the pro forma income statement is essential because it provides a forecast of the expected revenues, expenses, and profits for a specific period. This statement lays the groundwork for understanding potential earnings, which is crucial for making informed business decisions and projections.

Next, the pro forma balance sheet is prepared. This statement reflects the financial position of the organization at a given point in time. It utilizes the net income calculated from the income statement to adjust the equity section and to reflect changes in assets and liabilities based on the projected operations and capital decisions.

Finally, the pro forma cash flow statement is generated, which is derived from the income statement and balance sheet. The cash flow statement illustrates how cash is expected to flow in and out of the business during the period, tracking the effect of operating, investing, and financing activities. Since cash flow is a critical indicator of financial health, it is informed by the earlier statements to ensure coherence and accuracy in projections.

This systematic approach ensures that the estimates in each statement