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Corporate governance is of vital importance to a company and is almost as important as its primary business plan. When executed successfully, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. It also improves a company’s status in the public opinion as a self-policing company that is responsible and worthy of shareholder and debt holder capital. It commands the shared philosophy, practices and culture of an organization and its employees. Firm without a system of corporate governance is often regarded as a body without a soul or conscience. Corporate governance enables a company honest and free from trouble. If this shared attitude breaks down, then corners will be cut, products will be defective and management will grow complacent and corrupt. The end result is a fall that will occur when gravity in the form of audited financial reports, criminal investigations and federal probes finally catches up, destroying the company instantaneously. Deceitful and unethical dealings can cause shareholders to escape out of fear, distrust and disgust.Plethora of research has revealed that good corporate governance can result in improved share price performance. It is well established in management reports that there is a great potential for good performance by companies, which have got good corporate governance mechanism and the greatest benefit is in developing companies. Studies have showed that investors are enthusiastic to invest in a better-governed company. Corporate Governance can be strong mechanism for development especially in country like India.  

The following issues are important for good Corporate Governance. 

1.The rights and obligation of shareholders. 

2.Impartial treatment of all stakeholders. 

3.The role of all stakeholders clearly defined and the linkage for corporate governance established. 

4.Transparency, disclosure of information and audit. 

5.The role of board of directors clearly defined.

 6.The role of non-executive members of the board clearly defined. 

7.Executive management and compensation and performance clearly defined.  

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IMPORTANT TOPIC FOR SEBI GR A 2020 EXAM                                                                                                                                            COMMERCE & ACCOUNTS

RATIO ANALYSIS

Ratio Analysis and its Applications

Ratio analysis is a medium to understand the financial weakness and soundness of an organization. Keeping in mind the objective of analysis, the analyst has to select appropriate data to calculate appropriate ratios. Interpretation depends upon the caliber of the analyst.

Ratio analysis is useful in many ways to different concerned parties according to their respective requirements. Ratio analysis can be used in the following ways:

To know the financial      strength and weakness of an organization.

To measure operative      efficiency of a concern.

For the management to review      past year’s activity.

To assess level of      efficiency.

To predict the future plans      of a business.

To optimize capital      structure.

In inter and intra company      comparisons.

To measure liquidity, solvency,      profitability and managerial efficiency of a concern.

In proper utilization of      assets of a company.

In budget preparation.

In assessing solvency of a      firm, bankruptcy position of a firm, and chances of corporate sickness.

Advantages of Ratio Analysis

· It is powerful tool to measure short and long-term solvency of a company.

· It is a tool to measure profitability and managerial efficiency of a company.

· It is an important tool to measure operating activities of a business.

· It helps in analyzing the capital structure of a company.

· Large quantitative data may be summarized using ratio analysis.

· It relates past accounting performances with the current.

· It is useful in coordinating the different functional machineries of a company.

· It helps the management in future decision-making.

· It helps in maintaining a reasonable balance between sales and purchase and estimating working capital requirements.

Limitations of Ratio Analysis

Although Ratio Analysis is a very useful accounting tools to analyze and interpret different accounting equations, it comes with its own set of limitations:

· If the data received from financial accounting is incorrect, then the information derived from ratio analysis could not be reliable.

· Unauthenticated data may lead to misinterpretation of ratio analysis.

· Future prediction may not be always dependable, as ratio analysis is based on the past performance.

· To get a conclusive idea about the business, a series of ratios is to be calculated. A single ratio cannot serve the purpose.

· It is not necessary that a ratio can give the real present situation of a business, as the result is based on historical data.

· Trend analysis is done with the help of various calculated ratios that can be distorted due to the changes in the price level.

· Ratio analysis is effective only where same accounting principles and policies are adopted by other concerns too, otherwise inter-company comparison will not exhibit a real picture at all.

· Through ratio analysis, special events cannot be identified. For example, maturity of debentures cannot be identified with ratio analysis.

· For effective ratio analysis, practical experience and knowledge about particular industry is essential. Otherwise, it may prove worthless.

· Ratio analysis is a useful tool only in the hands of an expert.

Types of Ratio

Ratios can be classified on the basis of financial statements or on the basis of functional aspects.

Classification on the Basis of Financial Statement

Balance Sheet Ratios

Ratios calculated from taking various data from the balance sheet are called balance sheet ratio. For example, current ratio, liquid ratio, capital gearing ratio, debt equity ratio, and proprietary ratio, etc.

Revenue Statement Ratio

Ratios calculated on the basis of data appearing in the trading account or the profit and loss account are called revenue statement ratios. For example, operating ratio, net profit ratio, gross profit ratio, stock turnover ratio.

Mixed or Composite Ratio

When the data from both balance sheet and revenue statements are used, it is called mixed or composite ratio. For example, working capital turnover ratio, inventory turnover ratio, accounts payable turnover ratio, fixed assets turnover ratio, return of net worth ratio, return on investment ratio.       

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