CLM CLM Financial Management & Legal Budgeting 2 — Questions and Answers
Question 1: Which financial statement shows a firm's revenues, expenses, and net income over a specific period?
- Income statement (Correct answer)
- Balance sheet
- Statement of cash flows
- Statement of retained earnings
Correct answer: Income statement
The income statement (profit and loss statement) summarizes revenues and expenses to show net income for a defined period.
Question 2: What does the term 'leverage' refer to in a law firm partnership context?
- The ratio of associates to equity partners (Correct answer)
- The amount of debt used to finance operations
- The percentage of contingency fee matters
- The realization rate relative to billing rates
Correct answer: The ratio of associates to equity partners
Leverage in a law firm context measures how many associates or non-equity timekeepers support each equity partner.
Question 3: A legal manager implements a billing rate increase. Which financial report would FIRST reflect the impact of this change?
- Accounts receivable report (Correct answer)
- Cash flow statement
- Balance sheet
- Capital expenditure budget
Correct answer: Accounts receivable report
Higher billing rates increase the value of outstanding invoices, which first appears in accounts receivable before cash is collected.
Question 4: Which internal control practice best reduces the risk of financial fraud in a legal department?
- Segregation of duties (Correct answer)
- Annual external audit only
- Combining approval and payment authority
- Eliminating written financial policies
Correct answer: Segregation of duties
Segregation of duties ensures no single employee controls all aspects of a financial transaction, reducing fraud risk.
Question 5: In legal billing, what is the difference between a 'write-down' and a 'write-off'?
- A write-down reduces the billed amount; a write-off removes an uncollectible balance entirely (Correct answer)
- A write-off reduces the billed amount; a write-down removes it entirely
- Both terms describe the same adjustment
- Write-downs are only applied to disbursements
Correct answer: A write-down reduces the billed amount; a write-off removes an uncollectible balance entirely
A write-down adjusts the invoice to a lower amount before or after billing; a write-off eliminates an uncollectible receivable from the books.
Question 6: Which budgeting approach uses prior year actuals as the starting baseline and adds or subtracts a percentage for the new period?
- Incremental budgeting (Correct answer)
- Zero-based budgeting
- Activity-based budgeting
- Capital budgeting
Correct answer: Incremental budgeting
Incremental budgeting adjusts the existing budget by a set amount or percentage rather than rebuilding from scratch.
CLM CLM Financial Management & Legal Budgeting 2
Which financial statement shows a firm's revenues, expenses, and net income over a specific period?