ACCA Performance Management (F5) Certification Practice Exam

What characterizes a relevant cash flow?

1. It includes both past and future cash flows

2. It is a cash flow that is recognized from previous transactions

3. It refers only to future incremental cash flows

4. It ignores opportunity costs associated with financial decisions

The correct answer is: It refers only to future incremental cash flows

A relevant cash flow is defined as cash flows that are expected to occur in the future and will be directly influenced by a specific decision. This characteristic is vital for decision-making processes, particularly in assessments related to investment and project evaluation. Future incremental cash flows are essential because they provide insight into the actual financial impact of a decision. Only cash flows that change as a result of a particular decision are considered relevant, which supports the overall goal of maximizing financial performance. The other options do not align with the concept of relevant cash flows. For instance, including both past and future cash flows does not apply because past cash flows are sunk costs that cannot be altered by current decisions and therefore are irrelevant. Recognizing cash flow from previous transactions does not aid in decision-making about future options as it does not account for any prospective financial changes. Ignoring opportunity costs would also be inappropriate because opportunity costs represent the potential benefits lost when choosing one alternative over another, and these costs provide critical information for making informed financial choices.