Final answer:
Max should include depreciation expense in the pro forma statements for his car wash, reflecting the yearly allocation of the cost of the building and equipment over their useful life according to GAAP.
Step-by-step explanation:
As Max is opening a car wash with an initial investment of $225,000 for the building and equipment, when compiling the project's pro forma statements, Max should include the depreciation expense as a non-cash charge that reflects the wear and tear on these assets over time. Depreciation is calculated based on the useful life of the assets. For instance, if the building and equipment have an estimated useful life of 10 years with no salvage value, Max could use straight-line depreciation, which would be $22,500 per year ($225,000 / 10 years).
It's crucial to include depreciation expense in the pro forma income statements because it affects the net income, which investors and lenders will review. Including depreciation also aligns with GAAP (Generally Accepted Accounting Principles), ensuring that the financial statements provide a realistic picture of the financial health and performance of the business.