Production costs and income statement presentation Pirelli SpA is a large Italian tyre and cable manufacturer. Exhibit 9.16 shows part of the company’s 2001 consolidated income statement (in the English-language version).

Required

(a) Did the group’s inventories of work in process, semifinished and finished products increase or decrease in 2001? By how much?

(b) What is the meaning of ‘Raw materials, supplies and goods for resale’ under ‘Production costs’?
Is it the cost of purchases? Or is it the cost of items consumed and sold? Give evidence for your answer.

(c) Under ‘Production value’, Pirelli shows the item ‘Increase in property, plant and equipment’.
What is this? What would happen to profit (before tax) in 2001 if this item were not in the income statement?

(d) Pirelli describes a line item as ‘Difference between production value and production costs’. What is the more usual name for this?AppenedixLO1

Transcribed Image Text:

Exhibit 9.16 Pirelli SpA Consolidated 2001 income statement (extract) (amounts in million) 2001 (A) Production value Revenues from sales and services 7,509,220 Changes in inventories of work-in-process, semi-finished and finished products (99,559) Changes in contract work-in-progress (37,988) Increase in property, plant and equipment 16,313 Other revenues and income: (a) Miscellaneous (b) Government grants 193,770 7,516 Total production value (B) Production costs Raw materials, supplies and goods for resale Service expenses Lease and rent expenses Personnel Amortization, depreciation and write-downs: 7,589,272 (3,822,787) (1,181,035) (80,077) (1,501,738) (a) Amortization of intangible assets (46,571) (b) Depreciation of property, plant and equipment (324,062) (d) Write-downs of receivables included in current assets and cash and banks (77,174) Changes in inventories of raw materials, supplies and goods for resale (6,511) Other accruals (30,521) Other operating expenses (223,881) Total production costs (7,294,357) Difference between production value and production costs 294,915