FIFO vs Weighted Average for UAE Traders: Worked Example

FIFO (first in, first out) and weighted average are the two ways IFRS lets you cost stock that's interchangeable. FIFO assumes you sell the oldest units first, so your cost of sales uses older purchase prices and your closing stock is valued at the latest prices. Weighted average spreads the cost of every unit evenly, so each sale uses the average cost of what you hold. When purchase prices rise, FIFO gives a lower cost of sales and a higher profit than weighted average. LIFO isn't allowed under IFRS, which most UAE businesses report under.

How we wrote this guide. The accounting rules come from the IFRS Foundation's IAS 2 Inventories and the IFRS for SMEs Standard, and the UAE link to IFRS from the Ministry of Finance's corporate tax decision on accounting standards. The worked examples are ours. Agree your method with your auditor. Facts last verified: 3 November 2026.

The Rules in Brief

Lower of cost and net realisable value: under IAS 2, stock is measured at the lower of its cost and what you expect to sell it for, less the costs to complete and sell it.
Three cost formulas: specific identification for items that aren't interchangeable, such as a one-off machine. For interchangeable items, FIFO or weighted average.
No LIFO: the IFRS for SMEs Standard says LIFO isn't permitted (paragraph 13.18), and IAS 2 doesn't include it among the allowed formulas.
Consistency: use the same formula for stock of a similar nature and use. Different formulas are allowed only for stock that's genuinely different.
Why this matters in the UAE: for corporate tax, Ministerial Decision No. 114 of 2023 makes IFRS the default, with IFRS for SMEs allowed for businesses with revenue of AED 50 million or less. Neither allows LIFO.

How FIFO Works

FIFO treats the first units you bought as the first ones you sold. Each sale takes its cost from the oldest batch still in stock, then the next oldest.

Cost of sales reflects older prices.
Closing stock reflects the latest prices, so the balance sheet is close to current replacement cost.
In rising prices, profit is higher than under weighted average.

How Weighted Average Works

Weighted average divides the total cost of the units you hold by the number of units, and every sale uses that average. There are two versions:

Moving (perpetual) average: the average is recalculated after every purchase. Many ERP and inventory systems work this way.
Periodic average: one average is worked out for the whole period, from opening stock and purchases.

Weighted average smooths out price swings, so cost of sales and margins move less from month to month.

A Worked Example

A Sharjah trader buys and sells one product during January, selling everything at AED 20 a unit:

1 January: buys 100 units at AED 10 (AED 1,000).
10 January: buys 100 units at AED 12 (AED 1,200).
15 January: sells 150 units.
20 January: buys 100 units at AED 14 (AED 1,400).
25 January: sells 100 units.

Total purchases: 300 units for AED 3,600. Total sales: 250 units for AED 5,000. Closing stock: 50 units.

With FIFO

15 January sale: 100 units at AED 10 and 50 at AED 12 = AED 1,600.
25 January sale: the remaining 50 at AED 12 and 50 at AED 14 = AED 1,300.
Cost of sales: AED 2,900. Gross profit: AED 2,100.
Closing stock: 50 units at AED 14 = AED 700.

With Moving Weighted Average

After 10 January: 200 units cost AED 2,200, an average of AED 11.
15 January sale: 150 × 11 = AED 1,650. That leaves 50 units costing AED 550.
After 20 January: 150 units cost AED 1,950, an average of AED 13.
25 January sale: 100 × 13 = AED 1,300.
Cost of sales: AED 2,950. Gross profit: AED 2,050.
Closing stock: 50 units at AED 13 = AED 650.

With Periodic Weighted Average

Average for January: AED 3,600 ÷ 300 units = AED 12.
Cost of sales: 250 × 12 = AED 3,000. Gross profit: AED 2,000.
Closing stock: 50 × 12 = AED 600.

In every case, cost of sales plus closing stock equals the AED 3,600 you spent. The method only decides how that cost is split between this month's profit and the stock you carry forward. With prices rising, FIFO reports the highest profit and the highest closing stock.

FIFO vs Weighted Average: How to Choose

Perishable or dated goods, such as food, pharmaceuticals and cosmetics: FIFO matches how the stock physically moves, which makes valuation easier to explain.
Commodities and bulk items that are mixed together, such as fuel, grains or building materials: weighted average reflects that individual units can't be told apart.
Volatile purchase prices: weighted average gives steadier margins, and FIFO keeps the balance sheet closer to current prices.
Many small purchases: a moving average in an ERP keeps the calculation automatic. FIFO needs the system to track every purchase layer, which inventory software usually does for you.
Groups with several companies: use the same method for similar stock across the group, so consolidated figures are comparable.

Whichever you choose, choosing well matters more than choosing quickly. Under IFRS, changing the method later is a change in accounting policy, which needs a good reason and restated comparatives.

Costing Method vs Picking Method

How you value stock and how you pick it are separate decisions. You can pick by first-expired-first-out (FEFO) in the warehouse to sell dated goods before they expire, and still value the stock with weighted average in the accounts. Our warehouse management software guide covers picking strategies.

What It Means for VAT and Corporate Tax

VAT is charged on your selling price, so your inventory method doesn't change the VAT on a sale.
Corporate tax starts from the accounting profit in your financial statements, so the method affects the profit you report in each period, even though total profit over the life of the stock is the same.

Writing Stock Down

Whichever formula you use, stock can't stay on the books above what it can be sold for. Review slow-moving, damaged and near-expiry items at least at each month-end, and write them down to net realisable value where needed. Our month-end close checklist includes the step, and our chart of accounts has an account for stock write-downs.

Where Octate Fits

Octate's inventory management values stock using FIFO, LIFO or weighted average, across multiple warehouses, with batch and serial tracking. Stock movements post to the same ledger as sales and purchasing, so cost of sales and the stock balance stay in step. If you report under IFRS or IFRS for SMEs, choose FIFO or weighted average.

Quick Answers

What is the difference between FIFO and weighted average? FIFO costs each sale at the price of the oldest stock still on hand. Weighted average costs each sale at the average cost of all the stock on hand.

Which is better, FIFO or weighted average? Neither is better in general. FIFO suits dated goods that move oldest first, and weighted average suits goods that are mixed together or have volatile prices. Use the one that best reflects your stock, and apply it consistently.

Is LIFO allowed in the UAE? Not for financial statements under IFRS or IFRS for SMEs, the standards UAE corporate tax rules are based on. The IFRS for SMEs Standard says LIFO isn't permitted.

Which method gives higher profit? When purchase prices are rising, FIFO gives a lower cost of sales and a higher profit. When prices fall, the reverse.

What are the inventory valuation methods under IFRS? Specific identification for items that aren't interchangeable, and FIFO or weighted average for those that are, with stock measured at the lower of cost and net realisable value.

Can I change from FIFO to weighted average? Only as a change in accounting policy, which needs a good reason under IFRS and usually means restating comparative figures. Agree it with your auditor first.

Does the inventory method affect VAT? No. VAT is charged on the selling price, not on the cost of the stock.

Sources

IFRS Foundation: IAS 2 Inventories, the IFRS for SMEs Accounting Standard (Section 13, Inventories) and Educational Module 13: Inventories
Ministry of Finance: Ministerial Decision No. 114 of 2023 on the accounting standards and methods for corporate tax purposes
Octate: inventory management

Checked on 3 November 2026.