Updated November 24, 2023
Difference Between Stock vs Inventory
Inventory is a raw material for making the product, work-in-progress goods, and finished product. In other words, the inventory includes finished products ready to sell, work-in-progress goods not fully converted, and raw materials required to create the product. Inventory is generally found in manufacturing companies; service-based companies don’t have to carry inventory. Stock is a finished product ready to sell in a marketplace. Stock can also have raw materials if the company sells raw materials to customers. Using stock vs inventory interchangeably is technically wrong also, and it gives misinformation about the company’s financial health; one should be careful before using a term.
In layman’s terms, stock and inventory are used interchangeably, but these two things differ for accounting purposes. Both Stocks vs Inventory have different meanings and must be examined in detail. From an analyst’s point of view, it matters a lot what is stock and inventory because both give a different view of the company’s financials.
What is Inventory Meaning?
Inventory has inventory-carrying costs, so companies try to maintain inventory optimally. An optimum level of inventory is decided by management. Inventory carrying capacity and turnaround are majorly tracked majors for tracking the optimum level of inventory required for the business. An analyst looks into details of inventory turnover and compares them with a similar industry to understand the efficiency of handling inventory.
Inventory is categorized into the following categories –
Raw Material – Raw material builds a block to make a final product. Tata Motors buys steel bars, sheet metal, and tubing to manufacture vehicle frames and parts. When Tata Motor puts all materials into production and starts shaping the metal and cutting the bars, the raw material becomes work in process inventories.
Work in Progress – Work in progress includes the company’s partially finished products. As a car maker, all their inventory down the assembly line is considered work-in-progress until it is finished.
Finished Goods – Finished goods are products ready to sell to retailers, end users, or wholesalers. In Tata Motor’s case, finished cars are the finished goods.
Inventory is accounted for in three ways: First in, First out ( FIFO ), Last in, First Out ( LIFO ), and Weighted average method. Management can choose whichever method suits their business. But each chosen method has its implications on the income statement in different scenarios, especially when prices of raw materials fluctuate. Frequent change in accounting method is considered as manipulation of accounting books.
Examples of inventory of tyre company –
- Rubber (Raw Material)
- Carbon Black (Raw Material)
- Chemical (Raw Material)
- Synthetic rubber (Raw Material)
- Steel (Raw Material)
- Wires (Raw Material)
- Tyres (Finished goods)
- Tyres without threads (Work in progress)
What is the Stock Meaning?
Stock is a finished product ready to sell in a marketplace. Stock can also have raw materials if the company sells raw materials to customers.
A stock is valued at the cost of acquisition or market price, whichever is less. As the stock gets sold, it is removed from the balance sheet and recognized as revenue in the profit and loss statement.
Example of stock of tyre company –`
- Tyre (Finished Product)
- Carbon black (raw material – if the company also sells)
Whenever a stock is piling up on the balance sheet, it means finished products are not selling into the market, which becomes a worrisome condition for the management. Either they should cut down the production or push the product into the market because carrying stock on a book is always painful for the company financially. Companies like Eicher Motors, having good demand for their product or waiting period, generally have zero stock. Zero stock is the best case for the company as it shows high product demand. Plus, a company doesn’t have to carry stock costs. The more the stock sold, the more the revenue. Stock levels rising on the balance sheet is considered the analyst’s red signal.
Stock is nothing but part of the inventory. Tracking stock data becomes imperative because it shows finished product sales. Some companies track stock data on day to day basis.
Head To Head Comparison Between Stock vs Inventory (Infographics)
Below is the top 6 difference between Stock vs Inventory
Key Differences Between Stock vs Inventory
Both Stock vs Inventory are popular choices in the market; let us discuss some of the major Difference Between Stock vs Inventory
Inventory comprises raw materials, work in progress, and finished products, whereas stock comprises finished products only.
The company performs quarterly inventory accounting, while it carries out daily stock accounting. The company optimally maintains inventory to maximize profit. Ideally, zero stock is the best-case scenario, but the company should produce enough to meet the demand in the market.
Stock vs Inventory Comparison Table
Below is the 6 topmost comparison between Stock vs Inventory
|
The Basis Comparison |
Inventory |
Stock |
| Consists of |
|
|
| Accounted | Acquisition cost or market price, whichever is less | Acquisition cost or market price, whichever is less. |
| Maintained on | Quarterly basis | Daily Basis |
| Which is higher | Higher compared to stock | Lower compared to the inventory |
| Best case scenario | Optimal inventory | Zero stock |
| Example | For tyre companies –
Rubber, carbon black, chemical, steel wire, tyre, unfinished tyre |
For tyre companies –
Tyre, carbon black (if the company sales it directly) |
Conclusion – Stock vs Inventory
Stock vs Inventory two is a different thing technically and has a different meaning in accounting. Inventory and stock both terms give a different perspective in analyzing the business from an analyst point of view.
More stockpiling into the balance sheet is a red signal for analysts, whereas more inventory ordered signals more production and demand for the product.
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This has been a guide to the top difference between Stock vs Inventory. Here we also discuss the Stock vs Inventory key differences with infographics and a comparison table. You may also have a look at the following articles to learn more.
