CLM CLM Financial Management & Legal Budgeting 1 — Questions and Answers
Question 1: Which budgeting method requires each department to justify all expenditures from scratch each budget cycle?
- Zero-based budgeting (Correct answer)
- Incremental budgeting
- Activity-based budgeting
- Rolling budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires every expense to be justified anew each period rather than building on prior year figures.
Question 2: In a law firm, which financial metric measures revenue generated per attorney relative to billable hours worked?
- Realization rate (Correct answer)
- Utilization rate
- Collection rate
- Leverage ratio
Correct answer: Realization rate
The realization rate measures how much of billed time is actually collected compared to standard rates.
Question 3: What is the primary purpose of a trust account in a legal department?
- To hold client funds separately from firm operating funds (Correct answer)
- To pay attorney salaries
- To fund malpractice insurance
- To manage partner distributions
Correct answer: To hold client funds separately from firm operating funds
Trust accounts segregate client funds from the firm's own money to comply with professional responsibility rules.
Question 4: A legal manager reviewing a balance sheet would find which of the following classified as a long-term liability?
- Office mortgage (Correct answer)
- Accounts payable
- Accrued salaries
- Prepaid expenses
Correct answer: Office mortgage
A mortgage extends beyond one year and is therefore classified as a long-term liability on the balance sheet.
Question 5: Which cost allocation method assigns overhead expenses based on actual activity drivers such as billable hours or document volume?
- Activity-based costing (Correct answer)
- Direct cost method
- Step-down method
- Reciprocal method
Correct answer: Activity-based costing
Activity-based costing links overhead costs to the specific activities that consume resources.
Question 6: When a law firm's accounts receivable aging report shows significant amounts in the 90+ day bucket, what is the most immediate financial risk?
- Cash flow shortfall (Correct answer)
- Increased tax liability
- Higher realization rate
- Reduced malpractice exposure
Correct answer: Cash flow shortfall
Old unpaid invoices indicate clients are slow or unable to pay, directly threatening the firm's cash position.
CLM CLM Financial Management & Legal Budgeting 1
Which budgeting method requires each department to justify all expenditures from scratch each budget cycle?