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ALA CLM practice questions

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Question 1Legal Management Fundamentals

In most law firms, which role bears ultimate responsibility for the firm's compliance with legal ethics rules and for supervising the professional conduct of all lawyers in the firm?

  1. The managing partner or managing shareholder Correct answer.
  2. The largest client of the firm
  3. The outside accounting firm
  4. The most senior associate

Explanation

Ethics rules generally place responsibility for firm-wide compliance on the partners and those with managerial authority, typically exercised through the managing partner. This responsibility includes establishing policies and supervising lawyers and staff.

Question 2Legal Management Fundamentals

Under standard rules of professional conduct, a law firm's conflicts-of-interest screening system is primarily designed to do which of the following?

  1. Eliminate the requirement to keep client confidences
  2. Identify and resolve conflicts before or when a new matter is accepted Correct answer.
  3. Replace the need for written engagement letters
  4. Guarantee that no lawyer ever changes employment

Explanation

Conflict screening is a preventive control used during client and matter intake, and periodically thereafter, to detect situations where the firm's duties to one client may be compromised by another matter. It supports informed consent and declination decisions.

Question 3Legal Management Fundamentals

Which document most commonly establishes the scope of a lawyer's representation, the fee arrangement, and the client's responsibilities in a new matter?

  1. A firm's marketing brochure
  2. A court scheduling order
  3. A subpoena
  4. An engagement letter Correct answer.

Explanation

An engagement letter records the agreed scope, fee basis, and mutual expectations between lawyer and client. It is a core risk-management tool because it documents the boundaries of the representation.

Question 4Legal Management Fundamentals

A firm maintains a docketing and calendaring system. What is the primary purpose of this control?

  1. To store client trust account records
  2. To track and alert staff of litigation and filing deadlines Correct answer.
  3. To record billable hours for invoicing
  4. To calculate partner compensation

Explanation

Docketing systems capture deadlines from court orders, statutes, and rules and generate reminders so that deadlines are not missed. Missed deadlines are a leading source of malpractice claims, making this a key risk control.

Question 5Legal Management Fundamentals

Client funds held by a law firm must generally be kept in which type of account?

  1. The client's credit card account
  2. A partner's personal account
  3. A separate trust account Correct answer.
  4. The firm's general operating account

Explanation

Client funds must be held separately from the firm's own money, typically in a dedicated trust account, to protect them and prevent commingling. Commingling firm and client funds is a serious ethics violation.

Question 6Legal Management Fundamentals

Which of the following best describes a law firm's obligation regarding the supervision of nonlawyer staff?

  1. Staff supervision may be delegated entirely to the firm's IT department
  2. Only staff who meet clients require any supervision
  3. Supervision is required only for paralegals who bill time
  4. Lawyers must ensure staff conduct is compatible with the lawyer's professional obligations Correct answer.

Explanation

Lawyers are responsible for the conduct of nonlawyer assistants and must make reasonable efforts to ensure their behavior is compatible with the lawyer's professional obligations. This duty extends to all staff, not just those who meet clients.

Question 7Legal Management Fundamentals

A firm's records-retention policy should primarily be designed to address which concern?

  1. Ensuring all lawyers use identical filing cabinets
  2. Reducing the firm's marketing budget
  3. Maximizing the number of documents stored indefinitely
  4. Preserving records needed for legal, ethical, and business purposes while disposing of others lawfully Correct answer.

Explanation

A records-retention policy identifies what must be kept, for how long, and how to dispose of records lawfully, balancing preservation duties against the burden of indefinite storage. It should be applied consistently across the firm.

Question 8Legal Management Fundamentals

Which of the following is the most accurate description of a law firm's duty of confidentiality with respect to client information?

  1. It generally continues after the representation ends Correct answer.
  2. It applies only to information learned in court proceedings
  3. It ends when the client pays the final invoice
  4. It applies only to written documents

Explanation

The duty of confidentiality generally survives the termination of the representation and covers information relating to the representation regardless of its source or form. Lawyers must protect client information even after the matter closes.

Question 9Legal Management Fundamentals

A firm is implementing a new document-management system. The legal management team wants to ensure that access to client files is limited to personnel working on the matter. Which control best addresses this requirement?

  1. Storing all files on removable media
  2. Role-based access permissions configured by matter Correct answer.
  3. Disabling document version history
  4. A single shared password for all staff

Explanation

Role-based, matter-specific access permissions restrict files to those with a legitimate need to see them, supporting confidentiality and ethical walls. Shared credentials undermine accountability and are inappropriate.

Question 10Legal Management Fundamentals

A firm discovers that a lawyer has been using unapproved cloud storage for client documents. What is the most appropriate first management response?

  1. Immediately suspend the practice, assess exposure, and remediate the data handling Correct answer.
  2. Publish the lawyer's name in the firm newsletter
  3. Delete all client files to eliminate risk
  4. Ignore the issue because cloud storage is convenient

Explanation

The firm should stop the noncompliant practice, assess what data was exposed and whether confidentiality was compromised, and remediate with approved tools and training. This reflects the duty to safeguard client information.

Question 11Legal Management Fundamentals

Before accepting a new matter, a firm's intake process identifies that a current client is adverse to the prospective client in a substantially related matter. What is the most appropriate next step?

  1. Decline or obtain informed consent as required by the applicable rules Correct answer.
  2. Accept the matter if the new client pays a higher retainer
  3. Refer the matter to a lawyer in the same firm without further review
  4. Accept the matter and disclose the conflict only if asked

Explanation

When a conflict exists, the firm must either decline the representation or obtain informed consent where the rules permit it. Accepting without addressing the conflict risks breaching duties to the existing client.

Question 12Legal Management Fundamentals

A client sends a retainer payment that includes both advanced fees and a filing fee the firm will pay to a court. How should the firm handle these funds?

  1. Apply the filing fee to the firm's general expenses
  2. Place client and third-party funds in trust and withdraw them only as earned or as disbursed Correct answer.
  3. Hold the funds in a partner's personal account until the matter closes
  4. Deposit the entire amount in the operating account as earned revenue

Explanation

Funds belonging to clients or third parties must be held in trust and withdrawn only when earned or when a proper disbursement is made. The filing fee is a third-party fund that must be preserved for its purpose.

Question 13Legal Management Fundamentals

A firm's billing guidelines require that all time entries be reviewed before invoices are sent. Which management purpose does this review primarily serve?

  1. Improving accuracy and client trust in the billing process Correct answer.
  2. Determining lawyer vacation schedules
  3. Increasing the number of entries recorded
  4. Replacing the need for engagement letters

Explanation

Pre-invoice review catches errors, vague descriptions, and unauthorized charges, improving accuracy and preserving client confidence. It is a quality-control step in the billing cycle.

Question 14Legal Management Fundamentals

A firm wants to reduce the risk of missed deadlines when a lawyer is unexpectedly unavailable. Which practice best addresses this risk?

  1. Allowing only one person to access the calendar
  2. Relying on each lawyer's personal memory
  3. Removing deadlines from the system once entered
  4. Maintaining a centralized calendar with backup coverage and independent review Correct answer.

Explanation

A centralized calendaring system with backup coverage ensures deadlines are visible to more than one person and independently checked. This redundancy protects against individual unavailability.

Question 15Legal Management Fundamentals

A firm's malpractice insurer requests documentation of the firm's risk-management policies. Which set of documents best supports this request?

  1. Partner compensation spreadsheets
  2. Client holiday greeting lists
  3. Written policies on conflicts, intake, calendaring, and trust accounting Correct answer.
  4. Marketing plans and social media calendars

Explanation

Insurers and reviewers look for documented policies covering core risk areas such as conflicts, intake, deadlines, and trust accounting. Written policies demonstrate a systematic approach to risk management.

Question 16Legal Management Fundamentals

A lawyer leaves the firm and takes several clients. Which action best protects the firm's interests while respecting the departing lawyer's and clients' rights?

  1. Destroy the departing lawyer's files to prevent transfer
  2. Refuse to communicate with the departing lawyer
  3. Publicly accuse the lawyer of misconduct without evidence
  4. Follow a written departure protocol addressing client notice, file transfer, and confidentiality Correct answer.

Explanation

A written departure protocol manages client notification, file transfer, and confidentiality in an orderly way that respects client choice. Ad hoc or retaliatory responses create legal and ethical risk.

Question 17Legal Management Fundamentals

A firm's internal audit finds that trust account reconciliations have not been performed for two months. What is the most appropriate corrective action?

  1. Transfer the trust balance to the operating account to simplify records
  2. Perform the reconciliations promptly, document the correction, and strengthen the recurring control Correct answer.
  3. Delegate reconciliation permanently to the client
  4. Wait until the annual audit to address the gap

Explanation

Trust reconciliations should be performed on a regular schedule; a lapse should be corrected promptly and documented, with controls strengthened to prevent recurrence. This protects client funds and demonstrates accountability.

Question 18Legal Management Fundamentals

A firm is evaluating whether to accept a matter that would require expertise the firm lacks. What is the most appropriate management decision?

  1. Accept the matter and learn the specialty as work proceeds
  2. Decline, associate competent counsel, or refer the matter as appropriate Correct answer.
  3. Accept the matter but omit the specialty from the engagement letter
  4. Accept the matter only if the fee is increased

Explanation

Lawyers must provide competent representation; where the firm lacks the needed expertise it should decline, associate competent counsel, or refer the matter. Accepting without competence risks harm to the client and liability.

Question 19Legal Management Fundamentals

A firm's partners want to adopt a policy on handling subpoenas for client records. Which approach best reflects sound legal management?

  1. Establish a protocol for review, client notification where appropriate, and lawful response Correct answer.
  2. Comply immediately without notifying the client in every case
  3. Refuse all subpoenas as a matter of policy
  4. Forward subpoenas directly to the client without firm review

Explanation

A subpoena protocol should ensure the demand is reviewed for validity and scope, the client is notified where appropriate, and objections are raised in a timely manner. This balances legal obligations with client confidentiality.

Question 20Legal Management Fundamentals

A firm uses a vendor to host its email. Which arrangement best addresses the firm's confidentiality obligations?

  1. Rely on the vendor's standard terms without review
  2. Prohibit all use of email in the firm
  3. Store client information only on personal devices
  4. Obtain appropriate assurances of confidentiality and security and monitor performance Correct answer.

Explanation

When using a vendor, the firm should obtain reasonable assurances that client information will be protected and should monitor the vendor's performance. Outsourcing does not outsource the underlying duty.

Question 21Legal Management Fundamentals

A firm's managing committee is reviewing whether its conflict-check database captures enough information. Which design choice most improves the reliability of conflict screening?

  1. Recording only the names of clients who have paid in full
  2. Capturing adverse parties, related entities, and matter descriptions in a searchable format Correct answer.
  3. Limiting records to matters opened in the current year
  4. Relying on lawyers' recollection rather than a database

Explanation

Effective conflict screening requires capturing adverse parties, affiliates, and descriptive matter data so that searches can surface related matters. Complete, searchable records reduce the risk of missed conflicts.

Question 22Legal Management Fundamentals

A firm discovers that a partner has been billing a client for time spent on unrelated personal matters. Beyond correcting the invoice, what management response best addresses the underlying control failure?

  1. Review billing oversight, enforce accountability, and assess whether other matters are affected Correct answer.
  2. Reassign the partner to more client matters without review
  3. Increase the partner's billing target
  4. Take no further action because the invoice was corrected

Explanation

Correcting the invoice remediates the immediate harm, but management should examine why the oversight failed, hold the responsible lawyer accountable, and check for similar issues elsewhere. This addresses the root cause rather than the symptom.

Question 23Legal Management Fundamentals

A firm's written information-security policy requires encryption of client data at rest and in transit. A practice group argues that encryption slows workflow. How should management resolve this tension?

  1. Maintain the control, address workflow concerns with better tools or training, and document any approved exceptions Correct answer.
  2. Eliminate encryption firm-wide to improve speed
  3. Waive the policy for the practice group without documentation
  4. Allow individual lawyers to decide case by case without oversight

Explanation

Security controls should be maintained, with workflow concerns addressed through improved tooling or training, and any exceptions formally approved and documented. Undocumented waivers erode the control environment.

Question 24Legal Management Fundamentals

A firm is planning for the sudden incapacity of its managing partner. Which arrangement best preserves continuity of legal management?

  1. Document a succession plan assigning interim authority and decision-making responsibilities Correct answer.
  2. Transfer management authority to the largest client
  3. Suspend all firm decisions until the partner returns
  4. Rely on the managing partner's informal notes

Explanation

A documented succession plan with defined interim authority ensures the firm can continue to make timely management and ethical decisions during an unplanned absence. Continuity planning is a core governance control.

Question 25Legal Management Fundamentals

A firm's new matter intake form omits any question about whether the prospective client's matter is adverse to an existing client. What is the most significant consequence of this omission?

  1. It automatically creates a valid waiver of conflicts
  2. It eliminates the need for engagement letters
  3. It allows conflicts to go undetected until they surface later, increasing harm and remediation cost Correct answer.
  4. It reduces the time spent on intake without meaningful risk

Explanation

Intake is the primary point at which conflicts data is captured; omitting adverse-party questions allows conflicts to escape detection until they cause harm. The later the conflict is discovered, the more costly and damaging the remediation.

Question 26Legal Management Fundamentals

Which of the following best describes the primary purpose of a law firm's conflicts of interest policy?

  1. To ensure that all attorneys bill a minimum number of hours each year
  2. To establish a procedure for handling client complaints about billing
  3. To identify and address situations where a lawyer's or firm's interests may conflict with a client's, or where duties to multiple clients may be at odds Correct answer.
  4. To set guidelines for the use of social media by firm employees

Explanation

A conflicts of interest policy is designed to help the firm identify and manage situations where loyalties to one client could be compromised by duties to another client or by the firm's own interests. It typically includes procedures for screening new matters, checking prospective clients against existing clients, and obtaining informed consent where appropriate.

Question 27Legal Management Fundamentals

In the context of legal management, what does the term 'trust accounting' primarily refer to?

  1. The firm's general operating account used for daily expenses
  2. The handling of client funds held in trust, including proper recordkeeping and segregation from firm funds Correct answer.
  3. The investment of firm profits into long-term assets
  4. The process of auditing the firm's financial statements by an external accountant

Explanation

Trust accounting involves the receipt, maintenance, and disbursement of client funds held in trust. It requires strict recordkeeping, segregation of client funds from the firm's own funds, and compliance with applicable rules to protect client property.

Question 28Legal Management Fundamentals

Which of the following is a key component of a law firm's records management policy?

  1. A system for tracking billable hours
  2. A schedule for regular office parties
  3. A retention schedule that specifies how long different types of records are kept and how they are destroyed Correct answer.
  4. A list of approved vendors for office supplies

Explanation

A records management policy includes a retention schedule that dictates the duration for which various records must be kept and the methods for their secure destruction. This ensures compliance with legal and ethical obligations and efficient management of information.

Question 29Legal Management Fundamentals

Which of the following best describes the role of a law firm's managing partner?

  1. To represent the firm in all court appearances
  2. To oversee the firm's operations and strategic direction, often including administrative and personnel matters Correct answer.
  3. To handle all client litigation personally
  4. To serve as the firm's primary bookkeeper

Explanation

The managing partner is typically responsible for the overall management of the firm, including operations, strategy, and personnel. This role involves leadership and coordination rather than handling all legal work personally.

Question 30Legal Management Fundamentals

A law firm is implementing a new timekeeping system. The firm's administrator wants to ensure that attorneys record time in a way that supports accurate client billing and firm management. Which of the following practices best achieves this?

  1. Encouraging attorneys to estimate time in large blocks to save effort
  2. Allowing attorneys to submit time entries only at the end of the month
  3. Requiring attorneys to record only total hours worked each day
  4. Implementing a system that captures time in increments with detailed descriptions of tasks Correct answer.

Explanation

Detailed time entries in increments allow for accurate billing and provide data for firm management, such as analyzing profitability and staffing. This practice supports both client billing and internal decision-making.

Question 31Legal Management Fundamentals

A firm's legal management team is reviewing the firm's policy on client file retention. The firm is in a jurisdiction that requires client files to be kept for a minimum of seven years after the matter closes. Which of the following policies would best comply with this requirement?

  1. Destroy all client files one year after the matter closes to save space
  2. Retain client files for seven years after the matter closes, then destroy them according to a secure process Correct answer.
  3. Retain client files for five years after the matter closes, then review for destruction
  4. Retain client files indefinitely for all matters

Explanation

The policy must meet the minimum retention period of seven years. Retaining files for seven years and then destroying them securely complies with the requirement while allowing for efficient management.

Question 32Legal Management Fundamentals

A law firm is considering outsourcing its IT support to a third-party vendor. The vendor will have access to the firm's network and client data. Which of the following is the most important action for the firm to take to protect client confidentiality?

  1. Negotiate a lower fee for the services
  2. Require the vendor to sign a confidentiality agreement and conduct a security assessment Correct answer.
  3. Ask the vendor to provide references from other law firms
  4. Allow the vendor unrestricted access to all firm data to ensure quick resolution of issues

Explanation

When outsourcing IT support with access to client data, the firm must ensure that the vendor has appropriate confidentiality and security measures in place. A confidentiality agreement and a security assessment are key steps to protect client information.

Question 33Legal Management Fundamentals

A firm's managing committee is developing a policy for handling client complaints about legal fees. Which of the following approaches best balances client relations with the firm's financial interests?

  1. Automatically reduce the bill by 10% for any complaint
  2. Refer all complaints to the firm's outside counsel for litigation
  3. Ignore complaints unless the client threatens litigation
  4. Establish a procedure for prompt review of complaints by a designated person, with authority to adjust bills when warranted Correct answer.

Explanation

A structured procedure for prompt review allows the firm to address concerns fairly and efficiently, preserving client relationships and reducing litigation risk. It also provides a mechanism to adjust bills when appropriate, protecting the firm's financial interests.

Question 34Legal Management Fundamentals

A law firm's administrator is tasked with developing a budget for the upcoming year. Which of the following is the most appropriate first step in the budgeting process?

  1. Estimate revenue based on historical data and projected growth Correct answer.
  2. Cut all discretionary spending by 20%
  3. Purchase new office furniture for all staff
  4. Ask each attorney to submit a personal expense report

Explanation

The budgeting process typically begins with revenue forecasting, as expenses are planned in relation to expected income. Historical data and growth projections provide a reasonable basis for estimating revenue.

Question 35Legal Management Fundamentals

A firm is evaluating the performance of its paralegals. Which of the following criteria is most directly related to legal management objectives?

  1. The number of personal errands run for attorneys
  2. The frequency of attendance at optional social events
  3. The number of hours spent on social media during work hours
  4. The accuracy and timeliness of document production and client support tasks Correct answer.

Explanation

Performance evaluation should focus on job-related criteria that contribute to the firm's legal services, such as accuracy, timeliness, and quality of support. These factors directly affect client service and firm efficiency.

Question 36Legal Management Fundamentals

A law firm is planning to expand by opening a new office in another state. Which of the following is a primary legal management consideration regarding professional responsibility?

  1. Decorating the office in the firm's standard style
  2. Choosing the office with the lowest rent
  3. Hiring only attorneys who graduated from local law schools
  4. Ensuring that attorneys in the new office are licensed to practice in that state and understand local rules Correct answer.

Explanation

When opening an office in a new jurisdiction, the firm must ensure that its attorneys are properly licensed and familiar with local ethical and procedural rules. This is essential to comply with professional responsibility requirements.

Question 37Legal Management Fundamentals

A firm's managing partner discovers that an associate has been consistently overbilling clients by recording time spent on personal matters. Beyond correcting the bills, what is the most appropriate management response?

  1. Confront the associate, document the incident, and implement additional training and oversight Correct answer.
  2. Reassign the associate to a different practice group
  3. Ignore the issue to avoid conflict
  4. Immediately terminate the associate without further investigation

Explanation

The firm must address the misconduct directly, document it, and take steps to prevent recurrence through training and oversight. This balances accountability with due process and helps maintain ethical standards.

Question 38Legal Management Fundamentals

A law firm is negotiating a fee agreement with a client for a contingent fee matter. Which of the following is a required element of the agreement under most professional conduct rules?

  1. A provision that the firm will not be responsible for malpractice
  2. A written agreement signed by the client that explains the fee calculation and expenses Correct answer.
  3. A statement that the client waives all rights to dispute the fee
  4. A clause allowing the firm to withdraw at any time without notice

Explanation

Contingent fee agreements generally must be in writing and signed by the client, and must explain how the fee is calculated and what expenses are deducted. This ensures transparency and informed consent.

Question 39Legal Management Fundamentals

A firm's partners are considering a merger with another firm. Which of the following due diligence inquiries is most critical from a legal management perspective?

  1. Assessing the other firm's social media followers
  2. Evaluating the other firm's choice of office coffee supplier
  3. Comparing the decorative styles of the two firms' offices
  4. Reviewing the other firm's client base and conflicts of interest Correct answer.

Explanation

In a merger, conflicts of interest and client base are critical because they affect the combined firm's ability to represent clients and may require consent or withdrawal. This is a key legal management concern.

Question 40Legal Management Fundamentals

A firm's legal management team is reviewing the firm's malpractice insurance policy. Which of the following coverage features is most important to understand?

  1. The number of pages in the policy
  2. The policy's retroactive date and claims-made provisions Correct answer.
  3. The color of the policy binder
  4. The insurance agent's years of experience

Explanation

For malpractice insurance, the retroactive date and claims-made provisions determine which acts are covered and when claims must be reported. Understanding these features is crucial for managing risk.

Question 41Financial Management

Which financial statement reports a law firm's revenues and expenses over a period of time?

  1. The statement of cash flows
  2. The income statement Correct answer.
  3. The balance sheet
  4. The statement of partner capital

Explanation

The income statement measures financial performance across an accounting period by matching revenues with the expenses incurred to generate them. The balance sheet instead shows financial position at a single point in time.

Question 42Financial Management

A firm collects $60,000 from a client for work to be performed next quarter. Under accrual accounting, how should this be recorded when received?

  1. As revenue in the current period
  2. As an increase to retained earnings
  3. As a reduction of accounts receivable
  4. As unearned revenue, a liability Correct answer.

Explanation

Accrual accounting recognizes revenue when the performance obligation is satisfied, not when cash is received. Cash received before the work is done creates a liability (unearned revenue) that is later converted to revenue.

Question 43Financial Management

Which metric best measures how quickly a law firm converts its billed and unbilled work into cash?

  1. Utilization rate
  2. Realization rate
  3. Collection period Correct answer.
  4. Leverage ratio

Explanation

The collection period (days sales outstanding) measures the average time from billing to cash receipt. It captures how rapidly outstanding receivables are converted into cash.

Question 44Financial Management

A partner's capital account is credited when the partner:

  1. Is allocated a share of firm profits Correct answer.
  2. Incurs a personal expense unrelated to the firm
  3. Withdraws capital from the firm
  4. Receives a cash distribution

Explanation

Profit allocations increase each partner's capital account because the partner's equity in the firm grows. Distributions and withdrawals reduce the capital account rather than increase it.

Question 45Financial Management

A firm's revenue is $2,000,000 and its operating expenses are $1,700,000. What is the operating margin?

  1. 85.0%
  2. 15.0% Correct answer.
  3. 17.6%
  4. 12.0%

Explanation

Operating margin equals operating income divided by revenue. Operating income is $2,000,000 minus $1,700,000, or $300,000, which is 15% of revenue.

Question 46Financial Management

Which cost behaves as a fixed cost in the short run for a law firm?

  1. Contract review fees paid per document
  2. Courier charges billed per delivery
  3. Monthly office rent under a multi-year lease Correct answer.
  4. Associate bonuses tied to billable hours

Explanation

Fixed costs do not vary with volume within the relevant range, and lease rent is owed regardless of how much work the firm performs. Variable costs, by contrast, rise and fall with activity.

Question 47Financial Management

A client is billed $10,000 but the firm later writes off $1,500 as uncollectible. What is the collection realization on this matter?

  1. 100%
  2. 70%
  3. 85% Correct answer.
  4. 15%

Explanation

Collection realization compares cash actually collected to the amount billed. Collecting $8,500 of a $10,000 bill equals 85%.

Question 48Financial Management

What is the primary purpose of a cash flow forecast in a law firm?

  1. To set the firm's marketing budget
  2. To project the timing of cash inflows and outflows Correct answer.
  3. To calculate depreciation on fixed assets
  4. To determine partner compensation splits

Explanation

A cash flow forecast estimates when cash will be received and paid so the firm can anticipate shortfalls and surpluses. It supports liquidity planning rather than allocation of profit or accounting for fixed assets.

Question 49Financial Management

A firm has current assets of $900,000 and current liabilities of $600,000. What is its current ratio?

  1. 1.67
  2. 2.50
  3. 0.67
  4. 1.50 Correct answer.

Explanation

The current ratio equals current assets divided by current liabilities, so $900,000 divided by $600,000 equals 1.50. It indicates the firm holds $1.50 of current assets for each dollar of current liabilities.

Question 50Financial Management

Which of the following is a non-cash expense that reduces reported profit but not cash?

  1. Rent paid monthly
  2. Depreciation of office equipment Correct answer.
  3. Interest paid on a bank loan
  4. Salaries paid to staff

Explanation

Depreciation allocates the cost of an asset over its useful life and involves no cash outflow in the period. Salaries, rent, and interest are all settled in cash.