Understand Accounting in SAP

Lecture1 Finance Review and Introduction to ERP



Learning Objectives

Review Finance basic concepts

Introduction to SAP

Review an Introduction to SAP

Understand the definition of ERP and business processes

Understand the inter-related nature of an ERP system and the impact on finance

Explain the silo effect

Review SAP Business Suite and basic concepts (master data and transactional data)

Understand Accounting in SAP

Explain the goal of FI and CO

Understand the basics of SAP navigation

Finance Review Forms of Business Organizations

The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash.

Three major forms in the United States

Sole proprietorship, a business own by one person

Partnership, a business own by two or more individuals or entities

General, with unlimited debt liability

Limited, with some partners with limited debt liability

Corporation, a legal “person” distinct from owners and with limited liability

General, subject to double taxation

S Corporation is taxed through its shareholders avoiding double taxation

Limited liability company allows to operate and tax like a partnership but retain limited liability for its owners

Finance Review A Comparison

Fall 2015






Shares can be easily exchanged

Subject to substantial restrictions

Voting Rights

Usually each share gets one vote

General Partner is in charge; limited partners may have some voting rights



Partners pay taxes on distributions

Reinvestment and dividend payout

Broad latitude

All net cash flow is distributed to partners


Limited liability

General partners may have unlimited liability; limited partners enjoy limited liability


Perpetual life

Limited life


Corporations account for the largest volume of business (in dollar terms) in the U.S. Advantages include limited liability, unlimited life, separation of ownership and management (ability to own shares in several companies without having to work for all of them), liquidity, and ease of raising capital. Disadvantages include separation of ownership and management (agency costs) and double taxation. Recent tax laws reduce the level of double taxation, but it has not been eliminated.

Although the corporate form of organization has the advantage of limited liability, it has the disadvantage of double taxation. A small business of 75 or fewer stockholders is allowed by the IRS to form an S Corporation. The S Corp. organizational form provides limited liability but allows pretax corporate profits to be distributed on a pro rata basis to individual shareholders, who are only obligated to pay personal income taxes on the income. A similar form of organization is the limited liability corporation, or LLC. LLC’s are a hybrid form of organization that falls between partnerships and corporations. Investors in LLC’s have the protection of limited liability, but they are taxed like partnerships. LLC’s first appeared in Wyoming in 1977 and have skyrocketed since. They are especially beneficial for small- and medium-sized businesses such as law firms or medical practices.

 A Corporation by Another Name…Corporations exist around the world under a variety of names. Table 1.2 lists several well-known companies, along with the type of company in the original language.

Finance Review The Goal of Financial Management

The goal is to increase the value of the firm by maximizing investments while minimizing financing.

V = Σ CFt / (1+ i)t

Maximize the current value per share of the exiting stock

Fall 2015



Learning Objective: Apply goals of financial management in making decisions

Possible Goals

Profit Maximization – this is an imprecise goal. Do we want to maximize long-run or short-run profits? Do we want to maximize accounting profits or some measure of cash flow? Because of the different possible interpretations, this should not be the main goal of the firm.

Other possible goals that students might suggest include minimizing costs or maximizing market share. Both have potential problems. We can minimize costs by not purchasing new equipment today, but that may damage the long-run viability of the firm. Many dot.com companies got into trouble in the late 1990’s because their goal was to maximize market share. They raised substantial amounts of capital in IPO’s and then used the money on advertising to increase the number of “hits” on their site. However, many firms failed to translate those “hits” into enough revenue to meet expenses, and they quickly ran out of capital. The stockholders of these firms were not happy. Stock prices fell dramatically, and it became difficult for these firms to raise funds. In fact, many of these companies have gone out of business. The Goal of Financial Management From a stockholder (owner) perspective, the goal of buying the stock is to gain financially. Thus, the goal of financial management in a corporation is to maximize the current value per share of the existing stock. Is it ethical to sell a product that is known to be addictive and dangerous to the health of the user even when used as intended? Is the fact that the product is legal relevant? Do recent court decisions against the companies matter? What about the way companies choose to market their product? Are these issues relevant to financial managers?

How do we go about maximizing shareholder wealth?

Finance Review Agency Cost and Agency Problem

Agency relationship is the relationship that exist between stockholders and management

Principal hires an agent to represent its interests

Stockholders (principals) hire managers (agents) to run the company

Agency cost is the conflict of interest between stockholders and management

Stockholders goal is to increase the return on its investments (firm’s higher value)

Management may be more concern about its compensation or job security

Agency problem

Conflict of interest between principal and agent

Finance Review Do Managers Act in the Stockholders’ Interest?

Alignment between management and stockholders goals?

Managerial compensation

Incentives can be used to align management and stockholder interests

Incentives need to be carefully structured  to insure that they achieve their goal

Can management be removed if goals are different?

Corporate control

Proxy fights is the mechanism on which unhappy stockholders can remove management

Poorly manage firms are more attractive to takeovers

Finance Review Regulation

The Securities Act of 1933 and the Securities Exchange Act of 1934

Issuance of Securities (1933)

Creation of SEC and reporting requirements (1934)

Sarbanes-Oxley (“SOx”)

Increased reporting requirements and responsibility of corporate directors

Financial Statements and Cash Flow