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.
|
Historic |
Index |
CPP units as |
|
|
cost |
factor |
at 31.3.91 |
|
|
£000 |
000 |
||
|
Sales |
6500 |
2000/1875 |
6933 |
|
Opening stock |
700 |
2000/1700 |
824 |
|
Purchases |
4250 |
2000/1875 |
4533 |
|
4950 |
5357 |
||
|
Closing stock |
(900) |
2000/1937 |
(929) |
|
4050 |
4428 |
||
|
Gross profit |
2450 |
2505 |
|
|
Expenses |
1150 |
2000/1875 |
1227 |
|
Depreciation: |
|||
|
Original equipment |
500 |
2000/1025 |
976 |
|
New equipment |
50 |
2000/1813 |
55 |
|
Net operating profit |
750 |
247 |
|
|
Tax |
338 |
||
|
c/f |
412 |
||
|
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 |
Balance sheet as at 31 March 1990
|
Historic |
Index |
CPP units |
Index |
CPP units |
|
|
cost |
factor |
as at |
factor |
as at |
|
|
31.3.90 |
31.3.91 |
||||
|
£000 |
000 |
000 |
|||
|
Capital |
2500 |
1750 |
4605 |
2000 |
5263 |
|
Retained profit |
750 |
950 |
1142 |
1750 |
1305 |
|
3250 |
5747 |
6568 |
|||
|
Fixed assets |
|||||
|
Equipment |
5000 |
1750 |
8537 |
2000 |
9757 |
|
1025 |
1750 |
||||
|
Depreciation |
(1500) |
1750 |
(2561) |
2000 |
(2927) |
|
1025 |
1750 |
||||
|
Current assets |
|||||
|
Stock |
700 |
1750 |
721 |
2000 |
824 |
|
1700 |
1750 |
||||
|
Debtors |
1050 |
– |
1050 |
2000 |
1200 |
|
1750 |
|||||
|
Current liabilities |
|||||
|
Trade creditors |
(875) |
– |
(875) |
2000 |
(1000) |
|
1750 |
|||||
|
Non current liabilities |
|||||
|
Loan |
(1125) |
– |
(1125) |
2000 |
(1286) |
|
3250 |
5747 |
1750 |
6568 |
||
|
Balance sheet as at 31 March 1991 |
Historic |
Index |
CPP units as |
||
|
cost |
factor |
at 31.3.91 |
|||
|
£000 |
000 |
||||
|
Capital |
2500 |
2000 |
5263 |
||
|
950 |
|||||
|
Retained profit |
975 |
– |
1142 |
||
|
3475 |
6405 |
||||
|
Fixed assets |
|||||
|
Equipment |
5000 |
2000 |
9757 |
||
|
1025 |
|||||
|
Depreciation |
(2000) |
2000 |
(3903) |
||
|
1025 |
|||||
|
New equipment |
500 |
2000 |
552 |
||
|
1813 |
|||||
|
Depreciation |
(50) |
2000 |
(55) |
||
|
1813 |
|||||
|
Current assets |
|||||
|
Stock |
900 |
2000 |
929 |
||
|
1938 |
|||||
|
Debtors |
1150 |
– |
1150 |
||
|
5500 |
8430 |
||||
|
Current liabilities |
|||||
|
Trade creditors |
(400) |
– |
(400) |
||
|
Non current liabilities |
|||||
|
Loan |
(1625) |
– |
(1625) |
||
|
3475 |
6405 |
||||
Assume that inflation index increased evenly throughout the year ended 31 March 1991.
Required
(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.