Answer (D) is correct . The pro forma cost of goods sold must be prepared before the pro forma income statement because it is a component of the income statement. Also, the income statement must be prepared before the pro forma balance sheet because net income is a necessary part of preparing the stockholders’ equity section of the balance sheet. In turn, the income statement and the balance sheet are necessary for estimating cash flows. If the statement of cash flows is prepared using the indirect method, balance sheet data, e.g., the changes in accounts receivable, inventory, and accounts payable, must be available to determine the adjustments needed to reconcile net income to net cash flow.
Answer (A) is incorrect because The balance sheet should not precede the income statement.
Answer (B) is incorrect because The income statement cannot precede cost of goods sold.
Answer (C) is incorrect because The statement of cash flows cannot precede the cost of goods sold. The latter is an input of the former.
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