What Constitutes a Cash Flow?

The statement of cash flows tracks cash transactions. While it may seem simple to define a cash transaction, it may not always be so easy. A cash flow occurs only if there is a change in legal ownership.

For example:

• In an internal exchange transaction conducted solely with a bank, a cash transaction occurs only when the amount is posted to the agency's account. A service charge or interest payment is only considered a cash flow when it is posted. After that date, the interest is available for withdrawal and the amount paid for the service fee is no longer available for withdrawal.
• In a bond issuance, the agency may have issuance costs and underwriter fees. If the amounts were deducted from the bond proceeds, the agency only experienced one cash flow. The net amount is recorded as a cash inflow. However, if all bond proceeds were received and the payments for the bond issuance costs and underwriter fees were paid separately, the agency shows a cash inflow for the bond proceeds and outflows for the payments.
• If a third party pays a vendor on behalf of the agency, the agency would not show any cash flow since they never had legal ownership of the cash. For example, the agency may decide to raise funds to construct buildings by issuing revenue bonds. If the bond issuance is handled by an external finance authority that remits the funds directly to the construction companies, no cash flow is recognized by the agency. However, if the agency receives the bond proceeds from the finance authority for distribution to the construction companies, cash flows do occur.

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