Content: Loss of stock by fire Loss of profit by fire Calculation of sum to be insured
Loss of stock by fire:
Steps for computation of claim for loss of stock by fire:
Step- 1 : ascertain GP % (i.e. GP %= GP X 100 )
Sales If GP is not given in Q then prepare trading and P/l a/c for previous year . Step-2: Prepare memorandum trading a/c from the beginning of the year till the date of fire and ascertain the cl.stock on the date of fire as bal fig . Step-3: calculate gross claim as under: Stock as on the date of fire xxx (-) Salvaged stock (i.e. rescued stock ) (xxx) (+) fire fighting exp ( if any ) xxx Gross claim xxx
Note: fire fighting exp shall be restricted to lower of
salvaged stock or actual expense Step-4: Calculation of net claim : o by applying average clause: Gross claim X policy value Stock on date of fire
o without applying average clause:
Gross claim or policy value (whichever is lower) Note: Net claim cannot exceed gross claim . If it exceeds then limit your answer to gross claim.
Treatment of Abnormal items or slow-moving items or poor
selling line of items:
Abnormal goods refer to outdated and obsolete goods whose
demand has decreased due to innovation and invention. So, the realizable value of these goods is generally below cost. So, these goods are valued at NRV. For the purpose of the determining the normal GP%, these goods are brought to cost in trading a/c. whenever abnormal goods are given in the question, prepare memorandum trading a/c in columnar for and determine the stock separately for each type of goods. In memorandum trading a/c , abnormal goods sold are recorded at sold amt and loss on sale is also recorded and carried down. For reference: Sale of goods on approval – journal entries on the date of sending the goods to the buyer: Debtors a/c Dr To sales ( @sales val) on year end (when goods are pending approval) o sales a/c Dr to Debtors a/c (@sales val) o goods with customer on approval a/c Dr to trading a/c
so, reduce goods sold on approval but not approved
from sales and Dr stock with customer(@cost) to the trading a/c.
Calculation for loss of profit due to fire
loss of profit policy refers to a policy which enables the entity (insured) to recover the foll 3 things from insurance co. decline in profits caused due to decline in sales caused by fire fixed exp (insured standing charges) addn exp (ex. Rent of the new premises) every loss of profit policy will have 2 periods mentioned in it: o policy period- the damage must take place during this period. It is for 1 year. o Indemnity period- Max period for which insurance co. will compensate the insured
Calculation of claim under loss of profit policy:
Step 1: Calculation short sales
Standard sales xxx +/- trend in sales xxx xxx (-) Actually sales (xxx) Short sales xxx
Step 2: Computation of GP%
(NP of Py + ISC ) X 100 = xx ( GP=UISC+ISC+NP py) Sales of py (GP- UISC=ISC+ NP py) +/- trend in GP = xx (ISC= insured standing charges)
Step 3: computation of GP lost
Short sales X GP% = xxx
Step 4: calculation of additional exp:
Least of the following : o Actual additional exp ( AAE) xxx o Proportionate additional expenses= xxx AAE X GPR X AAT GPR X AAT+UISC
(if RITA is not available use actual sales ) RITA= Reduction in turnover avoided (extra sales generated by incurring additional expenses)
Step 5: Calculation of Gross Claim :
GP loss (step 3) xxx + claim for additional exp xxx - Savings in insured standing charges (xxx) Gross claim xxx
Step 6: Computation of Net claim
a) By applying any clause Policy value X gross claim GPR X AAT b) Without applying Avg Clause: Gross claim or PV lower of the two
Types of Sales req to solve the q on loss of profit
Policy value to be taken :
The following steps are applied Step 1: Determine expected sales for the prospective policy period. Step 2: Determine expected GP for the prospective policy period ( Expected sales- Expected COGS ) Step 3: Determine Increase in Standing charges to be incurred in the prospective policy period. Step 4: Determine Uninsured standing charges (UISC) Step 5: Policy val to be taken = expected GP + Increase in standing charges - UISC