Short Notes

Write short notes on a. What are the differences between Financial Accounts and Management Accounts? b. Who appoints External Auditors and to whom are they responsible? c. Why would (1) financial institutions and (ii) the public in general be interested in the accounts of a public limited company?

Financial Accounts vs Management Accounts

Financial Accounts	Management Accounts
Primarily for external stakeholders like investors ,creditors,and regulatory bodies	Primarily for internal users(managers) to aid in decision making and control.
They follow Generally Accepted Accounting principles or international Financial Reporting Standards	They are not bound by strict accounting standards,focus on both historical and future data and prioritize timeliness and relevance.
The main outputs are standardized financial statements (Balance Sheet, Income Statement, Cash Flow Statement)	Outputs are varied and tailored to specific management needs (e.g., cost reports, budgets, performance analysis)

Appointment and Responsibility of External Auditors:

External Auditors are independent professionals appointed to provide an objective opinion on the fairness of a company’s financial statements.8 In the case of a public limited company, they are typically appointed by the shareholders at the Annual General Meeting (AGM). While the management proposes the appointment, the ultimate decision rests with the owners of the company. External Auditors are primarily responsible to the shareholders, as their audit provides assurance that the financial information presented by the management is reliable and fairly represents the company’s financial position and performance. They also have responsibilities towards regulatory bodies and the public interest to ensure compliance and transparency.9

Interest in Public Limited Company Accounts:

(i) Financial Institutions: Financial institutions (banks, lenders, investors) are intensely interested in the accounts of a public limited company because these accounts provide crucial information for assessing the company’s creditworthiness and investment potential.10 They analyze the company’s profitability, liquidity, solvency, and cash flow to determine its ability to repay loans, generate returns on investment, and manage financial risks.11 Strong financial accounts instill confidence, while weak accounts may lead to higher borrowing costs or reluctance to invest.

(ii) The Public in General:

The public has a vested interest in the accounts of a public limited company for several reasons.12 Firstly, these companies often have a significant economic impact, employing a large workforce and influencing market trends. Their financial health can affect job security and the overall economy. Secondly, many members of the public may be shareholders (directly or indirectly through pension funds), making them owners with a direct financial stake in the company’s performance.13 Transparent and reliable accounts enable informed investment decisions.14 Thirdly, the public is interested in the accountability and ethical conduct of large corporations. Financial accounts provide a window into the company’s financial dealings and can highlight potential issues like mismanagement or fraud, fostering trust and transparency in the business environment.

Break Even Analysis

• Break-even analysis is a financial tool used to determine the point at which a business’s total revenue equals its total costs1 (both fixed and variable).2
• It helps to identify the minimum level of sales or activity required to avoid losses.3
• It highlights the relationship between costs, sales volume, and profits.4 ** Application in Shipping Business: **
• Voyage Profitability:
  • Calculating the break-even freight rate or cargo volume required to cover voyage costs (fuel, port charges, canal dues, etc.).
  • Assessing the viability of a particular voyage based on market freight rates and anticipated costs.
• Chartering Decisions:
  • Determining the break-even charter hire rate for a vessel, considering operating costs and financing costs.
  • Evaluating the profitability of different chartering options (time charter vs. voyage charter).
• Vessel Operations:
  • Analyzing the break-even utilization rate for a vessel to cover its fixed operating costs (crew wages, insurance, maintenance).
  • Optimizing vessel operations to minimize costs and maximize profitability.
• Investment Decisions:
  • Assessing the break-even point for a new vessel investment, considering capital costs, operating costs, and projected revenue.
  • Evaluating the financial feasibility of fleet expansion or modernization.
• Cost Control:
  • Analyzing the effect of increasing fuel costs, or port charges, on the amount of cargo that must be carried to achieve the break even point.
  • This allows a shipping company to make informed decisions about cost control.