Overcoming Financial Statement Challenges in the CPG Industry

Coca-Cola, PepsiCo, and Nestle have one thing in common. They are all major Consumer Packaged Goods (CPG) industry players, facing unique financial statement challenges that require innovative solutions. 

Behind every successful CPG company lies a complex web of financial management, inventory valuation, and accounting processes. 

The CPG industry is witnessing massive change in many aspects (do you know many CPG companies are increasingly going digital this year?). Whether you’re a seasoned veteran or a newcomer, navigating these waters can be challenging. But fear not- Expertise Accelerated is here to help. 

In this blog post, we’ll explore some of the most common accounting issues that CPG companies face, including inventory valuation, impairment of assets, and outsourced accounting services. 

Join us as we dive into the financial complexities of the CPG world and discover how our professionals can help streamline your accounting processes and set your business up for long-term success

Inventory Valuation 

•  Inventory valuation is a critical issue for CPG companies, as it can impact the accuracy of financial statements and the company’s profitability.
• When valuing inventory, CPG companies can choose between two commonly used methods: last-in, first-out (LIFO), and first-in, first-out (FIFO). 
• The LIFO method assumes that the most recently acquired inventory is sold first, while the FIFO method assumes that the oldest inventory is sold first.
• The selection of the inventory valuation method is important for CPG companies, as it can significantly impact their financial statements.
• Using either LIFO or FIFO, CPG companies can arrive at different values for their inventory, cost of goods sold, and gross profit.
• CPG companies must choose the method that best reflects their business operations and properly disclose this in their financial statements. 

For example, suppose a company experiences inflation in the cost of goods over time. In that case, the LIFO method may result in a lower taxable income than FIFO since the most recent and more expensive inventory is assumed to be sold first. 

On the other hand, if a company values the freshness of its products, it may choose FIFO to ensure that older inventory is sold first, thereby minimizing waste and spoilage.

Regardless of the method chosen, transparency and proper disclosure of the inventory valuation method in financial statements are essential for accurate and reliable financial reporting.

• The cost of goods sold (COGS) is a key metric for CPG companies to track. It represents the direct costs incurred to produce the goods sold during a given period. 
• However, it is important to note that the COGS should be based on the inventory sold, not the amount produced.
• This is because the cost of producing inventory is not necessarily the same as that of selling inventory. 
• COGS aims to match the direct costs of producing the goods with the revenue generated from selling them.

For example, a CPG company produces 10,000 units of a product in January for $5 per unit. If the company sells 8,000 units in January and 2,000 units in February, the COGS for January should be calculated based on the 8,000 units sold, not the 10,000 units produced.

• By matching COGS with the amount of inventory sold, rather than produced or on a cash basis, CPG companies can ensure that their financial statements accurately reflect the production costs and the revenue generated from sales. 
• This can help investors, lenders, and other stakeholders make informed decisions about the company’s financial performance and potential future growth.

Impairment of Assets

• Impairment of assets is a common issue for CPG companies, as it can impact the value of the company’s assets and the accuracy of the financial statements. 
• A solution to this issue is to regularly assess the value of assets and monitor any indicators of impairment to ensure timely recognition and measurement of impairment losses.

Let’s take the example of a CPG company that produces and sells personal care products. The company invested in a state-of-the-art manufacturing facility ten years ago, recorded on its balance sheet at $50 million. 

However, the facility is outdated due to changes in technology and consumer preferences. Plus, it has a fair value of only $30 million. In this case, the company must recognize an impairment loss of $20 million on its financial statements. This will reflect the true value of the facility.

Similarly, CPG companies may also face impairment issues related to their inventory. For instance, a food and beverage company may have a large inventory of perishable goods close to their expiration date or have become obsolete due to changes in consumer preferences. 

In this case, the company may need to adjust the value of its inventory on the balance sheet to reflect the lower fair value, which can result in reduced reported profits.

Outsourced Controller and Accounting Services for CPG Companies

Financial accounting and reporting can be complex and time-consuming for CPG companies, particularly when managing complex supply chains, inventory management, and forecasting demand.

That’s where our team at Expertise Accelerated comes in. We can help you streamline your accounting processes, ensure compliance with industry regulations, and provide valuable insights into your financial performance.

Our team of experts has years of experience in the CPG industry and can provide customized accounting solutions that fit your business needs. We also understand the unique financial accounting and reporting requirements of Consumer Packaged Goods (CPG) companies. 

Our outsourced controller and accounting services include:

• Bookkeeping and Accounting

Our team can handle all your bookkeeping and accounting needs, including accounts payable and receivable, bank reconciliations, and general ledger maintenance.

• Financial Statement Preparation

Accurate and timely financial statements that comply with industry regulations, such as GAAP and IFRS.

• Budgeting and Forecasting

Our experts can help you develop realistic budgets and forecasts that align with your business goals and objectives.

• CFO services

We can provide strategic financial advice and guidance to help you make informed decisions and achieve your long-term business objectives.

Outsourcing your accounting and financial reporting requirements to Expertise Accelerated allows you to concentrate on expanding your CPG business and delivering exceptional customer service. At the same time, we take care of the financial complexities.