ALA ALA Financial Management and Billing 1 — Questions and Answers
Question 1: Which billing method charges clients a set fee per month regardless of hours worked?
- Retainer billing (Correct answer)
- Hourly billing
- Contingency billing
- Blended rate billing
Correct answer: Retainer billing
A retainer arrangement charges a fixed monthly fee in exchange for a defined scope of legal services.
Question 2: Under the ABA Model Rules, which of the following makes a legal fee unreasonable?
- Charging for work not performed (Correct answer)
- Billing at the agreed hourly rate
- Sending itemized invoices monthly
- Requiring a written fee agreement
Correct answer: Charging for work not performed
Model Rule 1.5 requires that fees be reasonable and prohibits billing for services not actually rendered.
Question 3: What does a law firm's realization rate measure?
- Percentage of billed hours actually collected (Correct answer)
- Number of new clients per quarter
- Ratio of associates to partners
- Total billable hours logged per attorney
Correct answer: Percentage of billed hours actually collected
The realization rate is the percentage of billed amounts that are ultimately collected from clients.
Question 4: Which document summarizes a law firm's revenues, expenses, and net income over a reporting period?
- Income statement (Correct answer)
- Balance sheet
- Cash flow statement
- Accounts receivable ledger
Correct answer: Income statement
An income statement (profit and loss statement) reports revenues and expenses to show net income or loss for a period.
Question 5: What is the purpose of a trust account in a law firm?
- To hold client funds separate from firm operating funds (Correct answer)
- To pay attorney salaries
- To fund marketing campaigns
- To accumulate partner distributions
Correct answer: To hold client funds separate from firm operating funds
Trust accounts (IOLTA) must hold client funds separately from firm funds to prevent commingling, as required by state bar rules.
Question 6: Which financial metric indicates how quickly a firm collects outstanding invoices?
- Days Sales Outstanding (DSO) (Correct answer)
- Net profit margin
- Current ratio
- Accounts payable turnover
Correct answer: Days Sales Outstanding (DSO)
DSO measures the average number of days it takes a firm to collect payment after an invoice is issued.
ALA ALA Financial Management and Billing 1
Which billing method charges clients a set fee per month regardless of hours worked?