Finance
Financial statements and cash flow
Finance questions test how operating decisions reach cash flow. Know the income statement, operating expense ratio, NOI, debt service, before-tax cash flow, cash-on-cash return, and debt service coverage ratio (DSCR). NOI = effective gross income minus operating expenses; it does not include debt service, capital expenditures, income taxes, or depreciation. DSCR = NOI / annual debt service. Lenders often require 1.20 to 1.30x, but the exact covenant controls.
Traps
Do not subtract debt service when calculating NOI. Do not use gross potential rent when vacancy and credit loss are relevant. Distinguish cash-on-cash return (before-tax cash flow / equity invested) from return on assets. Watch accrual versus cash timing, recoveries, reserves, and whether a cost is operating or capital. Break-even occupancy is another common calculation: it shows how much occupancy is needed to cover operating expenses and debt service.
Worked example
NOI is $240,000 and annual debt service is $160,000. DSCR = $240,000 / $160,000 = 1.50. If the lender requires 1.25x, the property passes. Before-tax cash flow = $240,000 - $160,000 = $80,000. If equity invested is $800,000, cash-on-cash return = $80,000 / $800,000 = 10%. Rule of thumb: test every budget change for its effect on NOI, DSCR, and cash flow, not just on revenue.