The statement of cash flows is the final financial statement for the astute investor to be aware of. Its usefulness is, I guess, limited to two main purposes; to determine cash-on-cash return, and to predict cash flows.

Before we get into these two areas, we should review exactly what the statement of cash flows is. This statement is simply the Income Statement minus annual debt service (mortgage payments). When I say the "Income Statement" I mean the operating income statement NOT including depreciation/amortization. If you or your accountant deducts depreciation, which is a real possibility when determining net income, you must add it (and any other non-cash expenses) back in to determine the statement of cash flows. This is because depreciation is not really "spent".

The cash-on-cash return is used by many investors who base their investment decisions upon their cash return. Cash on cash is simply "Annual cash flow/original cash invested". So if you invested $200,000 to buy a property and the first year cash flow is $36,000 your return is 36,000/200,000 or 18%.

The next usage for the Statement of Cash Flows is to determine cash flows. This will help you estimate how much cash a particular property will produce for you in a given year, or how much cash it will consume in a given year.

To end our discussion of financial considerations, next we can talk about commonly used measurements of an invetment's performance and their relative usefulness.