What is a cash flow diagram?

• A. A risk assessment matrix.
• B. A visual representation of the flow of funds in a transaction.
• C. A schedule of depreciation.
• D. A chart of interest rates.

Answer: (B)

A cash flow diagram visually represents how money moves over time in a transaction. It uses a time axis and arrows or bars to show each cash movement, with outflows representing payments you make and inflows representing funds you receive. Seeing the timing and size of every cash item at a glance helps you analyze whether the deal covers its costs, when the money comes in, and how future cash should be valued today through concepts like present value or net present value. This isn’t about assessing risk (that’s a risk matrix), nor about depreciation schedules (that’s accounting/tax depreciation), or about tracking interest-rate changes (that’s an interest-rate chart). In a leasing or financing scenario, you’d plot things like the initial investment, periodic payments, and any eventual inflows, providing a clear picture of the transaction’s cash viability over time.