1) Not necessary but no guarantee you would not encounter issues / problems later. If you are willing to factory reset, by all means do so. If not, then you could always just update and factory reset later if you encounter problems.

2) Guess same as above. Although in theory, factory reset should wipe cache as well. No harm doing both. You need to press Power+Home+Vol Up to get to the menu screens for this option.

3) Factory Reset: Mean clearing all user data including downloaded apps, and restore to factory condition. Wipe data have different meaning and not sure what you are getting at.

4) Not sure, but am guessing its to clean data that was created by Android and is found in the system folder which you cannot access without root. Even individual apps have cache which should also wiped with factory reset.

5) YES.

 

just flash ICS 4.0.3 from GB 2.3.4 without wipe all cache, data or setting. And it fined, after flashed all data, settings, apps working as before.

But encounter 2 problems, internet not working and google play store cannot install/update app.. then it all solved.

here my video how I do it :

Nothing to do: Guide How To Install Ice Cream Sandwich into Samsung Galaxy S2 i9100 (HD Video) without wipe data and setting

 

Like I mentioned, you don't have to reset if you don't want to. You could do it after update and when you encounter problems. Last time when I upgraded from 2.3.3 to 2.3.6, I had reboot issues. It didn't happen all the time, but the good news was that it resolved itself after a few weeks of use.

Some are not so lucky and had many problems. Like I said, if the OP is willing to do it, then by all means do. But if not, then just flash first and see how it turns out.