Riverton Ltd. began operations on 28 June 2015 by purchasing $1000,000 of inventory. There were no sales up to the end of the financial year ending 30 June 2015. For the year ended 30 June 2016, additional inventory of $5000,000 was purchased. Expenses, excluding cost of sales and incentive bonuses to management, totaled $500 000. Total sales for the year were $8000,000. The company had in existence a management incentive scheme which provided bonuses, totaling 1% of profit (after income tax but before the bonuses), to be paid to management. Assume a company income tax rate of 30%.

The company was decided as to whether it should select the FIFO or weighted average method of accounting for inventories. If the FIFO method was selected, the ending inventory balance would be $1000,000 whereas, if the weighted average method was chosen, the inventory would be valued at $1400,000.

1.What effect would the alternative inventory methods have on the profit margin ratio? Based on this ratio, which method would be chosen?

Not sure how to calculate Profit Margin ratio = Net Income/ Net sales. Do I include the inventory that was purchased in the last financial year. I assume that based on the outcomes of the profit margin ratio you would pick the inventory method that will give the highest ratio?

2. Which inventory method do you think management would choose? Why?

I think that management would also choose the inventory method with the highest profit ratio as it will make the company look more attractive to investors and creditors but please correct me if wrong?

3. Assuming an efficient capital market discuss the effect (if any) that the alternative

inventory methods would have on the company's share price.

4. Discuss the advantages and disadvantages of management incentive schemes.

Not sure what to do here.