How does capital stock differ from inventory?

How does capital stock differ from inventory?

• A. Capital stock is a liability; inventory is an asset
• B. Capital stock is equity; inventory is an asset
• C. Capital stock is revenue; inventory is an asset
• D. Capital stock is an asset; inventory is a liability

Answer: (B)

Capital stock represents the owners’ contributed capital and appears in the equity section of the balance sheet. Inventory is goods the company holds for sale or for use in production and is classified as a current asset. These two terms sit in different parts of the balance sheet because they describe different kinds of resources and claims: equity shows the owners’ residual interest after liabilities are covered, while assets are resources the company controls. That’s why the correct description is that capital stock is equity and inventory is an asset. The other options misstate one of these classifications—for example, capital stock is not a liability, not revenue, and not an asset.

Capital stock represents the owners’ contributed capital and appears in the equity section of the balance sheet. Inventory is goods the company holds for sale or for use in production and is classified as a current asset. These two terms sit in different parts of the balance sheet because they describe different kinds of resources and claims: equity shows the owners’ residual interest after liabilities are covered, while assets are resources the company controls. That’s why the correct description is that capital stock is equity and inventory is an asset. The other options misstate one of these classifications—for example, capital stock is not a liability, not revenue, and not an asset.