Legal Work is a Test of Your Financial IQ

ACEDS offers a Mini MBA course which is designed to give legal professionals a baseline knowledge of finance. Given how much legal work concerns securities and business transactions, having a strong understanding of corporate finance and the ability to analyze financial statements can give you an edge in understanding the priorities of a legal team. Relevant accounting data can be targeted more effectively at the start of the electronic discovery process, and data produced in Excel spreadsheets or databases can be understood better.

In order to gauge your financial understanding and readiness for the Mini MBA, ACEDS offers a 12 question financial IQ test. Here's a rundown of some things I realized I needed to learn more about after taking the quiz.

  1. The balance sheet equation is a way of measuring the assets of a business as the sum of its liabilities and equity. So if a company purchases $200,000 of a resource on credit, and has $300,000 in cash on hand, its assets will be $500,000.

  2. Retained earnings are the sum of net income minus, dividends and bonus shares. This can also be referred to as plowback.

  3. Working capital is the sum of assets minus liabilities. So, a company that has a building worth $500,000, and $200,000 in cash, that also must pay $50,000 in wages and $50,000 in taxes, will have $600,000 in working capital.

  4. A balance sheet will only show a company's financial position at a particular point in time, not how that position changes over time.

  5. The yield to maturity on a bond shows its internal rate of return. So, a bond with a par value (the face value) of $100 and market value of $90 (the amount actually paid for it) that takes 10 years to mature and has a coupon rate of 10% (the interest paid to the owner annually) will have a yield to maturity of 11.75%.

  6. A dividend yield is found by dividing the dividend per share by the price per share. So, a company which pays $10 per share each year for shares that sell for $200, will have a dividend yield of 5 %.

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