ACCA Performance Management (F5) Certification Practice Exam

Which of the following statements about cash flow relevance is correct?

1. Depreciation is a relevant cash flow item

2. Only actual cash transactions are relevant

3. All past cash flows must be included for accuracy

4. Non-cash expenses should also be counted

The correct answer is: Only actual cash transactions are relevant

The concept of cash flow relevance is fundamental in performance management and financial analysis, particularly when making decisions surrounding projects or investments. Among the statements provided, the assertion that only actual cash transactions are relevant is accurate. This is because cash flows pertain to actual receipts and payments, which directly affect the liquidity and financial position of a business. In performance management, it’s essential to focus on cash flows that will genuinely affect an organization’s financial standing. Non-cash items, such as depreciation and amortization, do not represent actual cash movements. While they are important for accounting purposes and may affect taxes, they do not impact the cash position of the business in the context of decision-making like capital investment or operational efficiency. The idea that all past cash flows must be included for accuracy misunderstands the investment appraisal process, which is mainly concerned with future cash flows. By contrast, the cash flows that occurred in the past are typically regarded as sunk costs and are therefore not relevant to future decisions. Non-cash expenses, while they may impact profit and loss calculations or tax liabilities, do not contribute to any cash resources available for a business either. Considering non-cash expenses in the context of cash flow relevance would lead to confusion, as they do not represent an incoming