MPA702 Assignment 1: Financial Statements and Liability Analysis

This MPA702 assignment presents a comprehensive analysis of financial statements and business liabilities. Part A includes a transaction analysis chart, detailing assets, liabilities, and owner's equity over a period. Part B provides a classified balance sheet and income statement, offering insights into the financial health of a health policy and research consultancy. Part C delves into the legal aspects of business liability, contrasting sole proprietorships and private limited companies, and explaining the circumstances under which a director's limited liability can be disregarded. The analysis covers various scenarios, such as personal guarantees, misrepresentation, and fraudulent activities, providing a detailed understanding of financial and legal responsibilities. The assignment concludes by summarizing the director and shareholder liabilities within a private limited company context, emphasizing that, under specific conditions, they can still be held personally responsible for business debts.

MPA702 Assignment 1
Name:
Student Id:
Part A
Transaction Analysis Chart
Date
Description of Transactions
Assets Liabilities Owner’s
equity
1 April Initial Investment +160,000 +160,000
2 April Office Space
+360,000
+324,000
2 April Payment for Office Space -36,000
3 April Purchase of Office Equipment +-18,000
3 April Purchase of Medical Journal +- 3600
4 April Purchase of Office furniture +- 3000
4 April Insurance payment +- 2400
4 April Purchase of office stationery +860 -860
5 April Credit purchase of motor vehicle +30,000 -30,000
12 April Invoiced Carringvale + 2000
13 April Donated personal Laptop + 4500 -4500
16 April Invoiced Client +9800
17 April Cash At Bank +2000
30 April Paid Mortgage -2800 -1600 -1200
1 May Invoiced a client +9800
1 May Withdrawal for personal use -2400 -2400
1 May Paid wages -1200
24 May Payment received +- 5800
26 May Telephone & Internet bills paid +- 320
27 May Services provided to Big Pharma Ltd
as Big Pharma Ltd (35 days)
+- 77,000
30 May Paid Mortgage -2800 -1600 -1200
2 June Invoiced a client for services +9200
9 June Paid wages -1800 - 1800
16 June Motor vehicle expenses -580
16 June Credit sales received +8400
25 June Personal withdrawal +2800
25 June Payment for office stationery -260
30 June Mortgage Repayment -2800 -1600 -1200

MPA702 Assignment 1
Part B:
Health policy and research consultancy
Classified Balance Sheet
As At 30th June/ 2018
ITEMS AMOUNT ($)
ASSETS
Current assets
Cash at Bank 85265
Trade receivables 8300
Cash In Hand 91200
Total current assets 184765
Fixed assets
Office Space 360,000
Motor Vehicle 28500
Office Equipment 16,650
Office furniture 2925
Office Stationery 860
Total non-current assets 408,935
Total assets 593,700
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables 27400
Deferred tax 800
Total current liabilities 28200
Long-term liabilities
Long-term mortgage 324000
Total liabilities 352200
Shareholders’ Equity
Initial equity 164500
Personal earnings 77,000
Total Equity 241500
Total liabilities and equity 593700
Health policy and research consultancy

MPA702 Assignment 1
Classified Income Statement
As At 30th June/ 2018
ITEMS AMOUNT($)
Revenue & Gains
Service Fee 93200
Total Revenue & Gains 93200
Less: Expenses & Losses
Insurance 2400
Mortgage Principal 3200
Interest 2400
Wages 2200
Telephone & Internet 320
Motor Vehicle 580
Depreciation 2925
Office Supplies 500
Utility Owing 680
15205
Net Income 77995
Part C:
Just like Park, most people are concerned with the liability status of their
businesses before starting operations. Liability forms the basis of choosing between
setting up either sole proprietorship or a private limited company. Both business
structures have their advantages and disadvantages. Limited companies have
separate legal entity from their shareholders/ directors, while sole proprietorships do
not (Latimer, 2012). In a situation where a sole proprietor faces financial difficulties,
its owner will have unlimited liability for its debts. On the other hand, the liability of
shareholders/ directors of the company to its debts are limited (Muscat, 2016).
In a business context, liability is defined as the money a business owes
outsiders such as creditors and suppliers. The debts come in the form of unpaid hire
purchase, unpaid invoice, and unpaid loans. In Australia, directors/ shareholders
cannot be held personally responsible for the debts owned by their companies

MPA702 Assignment 1
(Bottomley, Hall, Spender, & Nosworthy, 2017). However, there are situations where
the limited liability status enjoyed by company directors and shareholders can be
disregarded. In such a situation directors is personally responsible for the company’s
debts. Therefore, as a sole director of the company, Park can still be liable for the
debts of her company (Latimer, 2012).
The circumstances where limited liability status can be disregarded include:
First, sometimes directors sign personal guarantee on contract, lease or loan
for the company. They become personally liable for the debt when the company
cannot repay (Bottomley, Hall, Spender, & Nosworthy, 2017).
Second, lenders might require Park to use her personal property/ assets as
security before securing a loan. If the company is unable to repay the loan, such
properties/ assets would be repossessed by the lender (Bottomley, Hall, Spender, &
Nosworthy, 2017). Likewise, Park will be personally liable for unpaid company debts
if she uses her home equity loans or credit cards to maximize the company’s capital
(Latimer, 2012).
Third, insufficient disclosure of financial reports, misrepresentations and frauds
might cause lenders to disregard limited liability status enjoyed by company directors
(Latimer, 2012). A director becomes personally liable for the unpaid company debts
if she misrepresented facts when applying for a loan. Likewise, failure to separate
business and personal finances would render a director personally responsible for
the company’s debts (Muscat, 2016). Lastly, failure to maintain transparency and
accurate business accounts can be used by lenders to make directors personally
responsible for the unpaid company debts (Bottomley, Hall, Spender, & Nosworthy,
2017).

MPA702 Assignment 1
Fourth, directors can also be held responsible when they continue with
operations even after a company has been declared insolvent (Bottomley, Hall,
Spender, & Nosworthy, 2017). Engaging in either of the following practices renders
directors personally liable for company debts; one continued operation without
repaying company debts. Two, using fraudulent ways to repay debts (Muscat, 2016).
Three, selling the company’s assets at an undervalued price. Four, favouring some
creditors over others. And five, directors choosing to pay themselves and ignore the
creditors and staff (Latimer, 2012).
Fifth, directors can also be held personally responsible where an investigation
has revealed that their actions lead to ‘wrongful trading’ (Latimer, 2012). Directors
might choose to maximize their own interest instead of maximizing the creditors’
returns. Such a situation might lead a company to insolvency (Bottomley, Hall,
Spender, & Nosworthy, 2017). In such a circumstance, directors should be held
personally liable for the unpaid company’s debts.
Just like company directors, shareholders also enjoy protection from company
liabilities (Latimer, 2012). However, the protection from liabilities can be disregarded
if; one, the shareholders have personally signed for a debt. And two, if the
shareholders have acted fraudulently or improperly for instance, where they have
used the business money for their personal benefits (Bottomley, Hall, Spender, &
Nosworthy, 2017).
Based on this analysis, Park enjoys limited liability to the company debts as a
director and shareholder of the private limited company. However, the limited liability
protection can be disregarded based on the circumstances listed above. In
conclusion, as a director and shareholders of the company, Park could still be held
personally responsible for its debts.

MPA702 Assignment 1
References
Bottomley, S., Hall, K., Spender, P., & Nosworthy, B. (2017). Contemporary
Australian Corporate Law. Sydney: Cambridge University Press.
Latimer, P. (2012). Australian Business Law 2012. Sydney: CCH Australia Limited.
Muscat, A. (2016). The Liability of the Holding Company for the Debts of its Insolvent
Subsidiaries. New York: Taylor & Francis.