Loss of Property and Stocks
Loss of Property and Stocks
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Procedure:
The insured, in the event of fire accident, informs the insurer (Insurance Company) of the
loss of property and stocks. The insurance contract is usually for a year and the insurer
indemnifies the insured for the loss suffered.
In response to the request of the insured, a technical expert is entrusted by the Insurance
Company; and the technical expert, after investigation, sends his report by stating the amount
payable by the Insurance Company to the insured. His report, after a careful investigation,
must reveal the causes due to which the fire broke out and whether the claim is covered by
the policy or not.
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The values of assets other than stock can be ascertained at any time. The stocks with which
he deals are not maintained daily. Moreover, stock-taking every day is not possible and is a
very difficult job. In such a situation, one has to estimate the loss of value of stock on account
of fire by preparing a statement or a Memorandum Trading Account.
Step 1: First, try to know the value of opening stock of the year, in which the fire broke out.
Step 2: To the above (Step 1), add the net purchases made up to the date of fire.
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Step 3: From the result of Step 2, deduct the cost of goods sold.
Step 4: From the result of Step 3, deduct the salvaged stock; and the figure finally available
is the loss of stock due to fire.
The cost of goods can be found out in the following ways. Rather, the method of finding out
the cost of goods sold depends upon the nature of questions.
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(1) When sales figure has been given in the question along with the rate of Gross Profit, then
deduct the Gross Profit from the sales in order to get the cost of goods sold.
That is:
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(2) When the rate of Gross Profit on sales is given, then the
(3) When the rate of Gross Profit on cost is given, Gross Profit is found out on the basis of
sales. For instance, Gross Profit is 25% on cost, and then the sales rate is 125%. Therefore,
the
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(4) In certain cases, the rate of Gross Profit is not given in the problem. In such a situation,
the percentage of Gross Profit on sales earned last year is applied to the current year.
Therefore, by preparing a Trading Account of the previous year, the rate of Gross Profit is to
be found out. This percentage of Gross Profit is applied to know the estimated Gross Profit in
the current year, when the fire occurred.
It is important to note that when calculating the rate of Gross Profit, the abnormal
circumstances of sales may be ignored. For instance, products, which were damaged, might
have been sold at a low price or products were sold at higher price during over-demanded
period. These situations may be ignored when calculating the Gross Profit.
It is also possible that the rate of Gross Profit may show an increased or decreased trend
during the previous years – year by year. In such cases, weighted average of these rates can
be found out and Gross Profit is estimated on the basis of weighted average.
Loss of stock can also be ascertained instead of Statement (mentioned above), by preparing a
Memorandum Trading Account, to the date of fire.
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Illustration 1:
Hence, an amount of Rs 23.000 to be claimed from the Insurance Company.