Walls and Ceilings - Tub Surround

We're putting a bathtub and surround in a (new) basement bathroom. The tub has been set and the surround has been mounted to the bare studs. The room is about to be drywalled. We've already purchased the 'green' sheetrock (although it seems maybe taht's not the right stuff?). My question is, "How do we finish the area above the surround. There is a flange - does the sheetrock just go over the flange, and caulk it up good, or what? ( We do not plan on tiling, if that matters)

If you choose to paint the wall above the surround, the greenboard is appropriate. If you plan on tiling it, then you will need to install 1/2" tile backer board. On the stud faces, tack a length of 1 1/2" x 1/4" lattice. This will bring the stud faces flush with the top of the surround. Install the back pieces of sheetrock, and then full pieces cut out over the front and back. You will notice the wall will fall back the 1/4" you have increased over the surround, but it will be unnoticeable as long as you span the studs with sheetrock.