An assistant accountant of Changeling plc has been requested to prepare a profit and loss account using the CPP model for the year ended 31 March 1991. He has calculated the net operating profit for the year and the remaining entries are yet to be completed.

The profit and loss accounts for the year ended 31 March 1991 are set out below, comprising the historic cost profit and loss account and partially completed CPP profit and loss account.

Assume that inflation index increased evenly throughout the year ended 31 March 1991.
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(a) Calculate the retained profit (loss) for the year using the CPP Model for the year ended 31 March 1991.

(b) Explain what the method of indexing is attempting to deal with and discuss the process from the viewpoint of both the entity and the proprietors.

(c) Write a brief report to the principal shareholder of Changeling Ltd who holds \(20 \%\) of the issued share capital on the management of the company commenting on profitability, liquidity and financial structure.

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Historic Index CPP units as cost factor at 31.3.91 000 000 Sales 6500 2000 6933 1875 Opening stock 700 2000 824 1700 Purchases 4250 2000 4533 1875 4950 5357 Closing stock (900) 2000 (929) 1937 4050 4428 Gross profit 2450 2505 Expenses 1150 2000 1227 1875 4950 5357 Closing stock (900) 2000 (929) 1937 4050 4428 Gross profit 2450 2505 Expenses 1150 2000 1227 1875 Depreciation: Original equipment 500 2000 1025 New equipment 50 2000 1813 55 Net operating profit 750 Tax 338 Profit (loss) after tax 412 Gain (loss) on net monetary assets Gain (loss) on long-term loans Net profit (loss) for year 412 Dividends 187 Retained profit (loss) for year 225 Retained profit brought forward 750 Retained profit carried forward 975