Difference Between Inventory and Stock
There are many buzz words in finance which have been used interchangeably in many contexts. Though one would say that sometimes there may be a very thin line between correct and incorrect usage of such words but in the world of finance, accuracy means everything. One such pair that tops the list is inventory and stock. These two might appear to be highly correlated but yet are a world apart in their true sense especially when it comes to their context or valuation.
One is for the accountancy audience while the other one is for the business world especially to the sales department of the company due to its nature of affecting the company’s revenue directly. Also, one is more towards the costing side of valuation and the other is more market-driven when it comes to valuation in dollar terms.
Intrigued?
Let us embark upon a journey to find out the true nature of each of these terms in detail.
Inventory vs Stock Infographics
Key Differences
First, let us start with what the word inventory and stock mean in a literal sense. Inventory comprises three parts -the first part includes the value of all the finished products that the company can sell directly to the intended customer base.
- For a company like IKEA, the finished product is the furniture that is showcased in stores and sold to the customers, the second part includes the value of all the work-in-progress products that are currently in the processing stage and the company intends to convert them into a final product soon.
- For IKEA the work-in-progress product will be the furniture products that still need some processing before they can make it to the store and be sold to the customers. And finally, the third part is the raw material which includes all the basic input components that are required to manufacture the final product.
- Then how does the manufacturing cycle work? First, the company acquires the raw material from its suppliers, then the raw material undergoes several stages of processing during which it is referred to as work-in-progress product and finally when all the processing is completed, the finished product is floated into the market in order to be sold to the customers.
Now coming to Stock, one can say it is more of a plain jane. Stock refers to the product that a company sells to its customers. Now it may really sound simple but there is more to it than meets the eye. As per definition, the finished goods that we just referred above qualifies the definition of stock and it may appear that it is all it could be.
- Actually, the word stock in more of a business buzzword, unlike inventory which is an accounting buzzword. So, what’s the catch? There are numerous companies that sell many products which may be at different levels of processing in a value chain to a variety of customer base.
- If a company sells furniture then the final finished furniture units are referred to a company’s stock. But if the same company sells the wood or any other raw material or any work-in-progress product to its customers as well then, they also qualify to be tagged as stock.
- A stock can include anything that the company sells to the customers in order to strengthen the top line i.e. revenue.
- For example, Star Bucks sell its coffee, which is the finished product, to its customers. But at the same time, it also sells the raw coffee beans and other auxiliary products to enable its customers to brew the same coffee at the comfort of their home. Hence, all items sold to customers are stock.
Inventory vs Stock Comparative Table
| Basis | Inventory | Stock | ||
| Definition | Inventory refers to the value of a sum of finished products, work-in-progress products, and raw materials. | Stock refers to the products sold that could be in any form to the customer. | ||
| Context | It is used in an accounting context. | It is used in a business context as it directly affects the top line of the company. | ||
| Valuation | Inventory is valued at the cost incurred by the company using valuation methods like FIFO, LIFO and Average Cost. | It is valued at market value i.e. the selling price at which it is sold to the customers. | ||
| Frequency | It is valued just before the end of a financial reporting period. It is valued infrequently as compared to stock. | It is valued at quite frequent intervals and sometimes even on a daily basis. | ||
| Example | Cars as well as spare parts sold by a car dealer to its customers | Biscuits sold by a biscuit manufacturing company to its customers |
Application
The main application of this bifurcation is when it comes to the context where the word is being referred. For example, inventory is used in an accounting context and hence is valued at cost using various methods of inventory accounting like First-In-First-Out (FIFO), Last-In-First-Out (LIFO) and Average Cost methods.
On the other hand, the stock is used in more business context which is valued at the selling price and hence it directly affects the top line of the company. So stock valuation is more concurrent as it takes the market value into the account whereas inventory is valued at the cost at which the company had to incur to procure the raw material, process it and finally sell it to the market.
Conclusion
Inventory includes finished products, work-in-progress products and the raw material used to produce the finished and work-in-progress products. Whereas stock refers to any type of product that is sold by the company to its customers to generate revenue.
Inventory is used more in an actuarial sense rather than a business context whereas stock is more contemporary in terms of valuation. Inventory valuation is usually done just before the financial reporting period ends but stock audit usually happens on very frequent intervals or sometimes even daily basis. Though there are many ways to inject money into the business like by sale of assets, it does not count as revenue. Cash flow from selling a stock is counted as a valid revenue stream.
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