Final answer:
The statement is true; a pro forma income statement and balance sheet are prepared before a cash budget because they provide essential information for forecasting cash flows and assessing financial health needed for the cash budget.
Step-by-step explanation:
The question pertains to the order of creating various financial documents in the process of financial planning for businesses. The statement is true; the pro forma income statement and balance sheet are typically prepared before the cash budget. This is because the pro forma documents provide an estimate of future income and expenses, as well as the expected assets, liabilities, and equity, which are crucial for accurately forecasting cash flows and preparing a cash budget.
A pro forma income statement helps in predicting future revenue and operating expenses, while a pro forma balance sheet gives an outlook on the expected financial position of a company at a certain point in the future. These projections help in determining the expected cash inflows and outflows and in evaluating whether the company will have enough cash to meet its obligations, which is an essential part of cash budgeting.