1. The prescribed accounting treatment for stock dividends implicitly assumes that shareholders are fooled by "small" stock dividends and benefit by the market value of their additional shares.

1a. Explain this statement. Is it logical?

2. You are in your second year as an auditor with Dantly and Regis, a regional CPA firm. One of the firm's long-time clients is Mayberry-Cleaver Industries, a national company involved in the manufacturing, marketing, and sales of hydraulic devices used in specialized manufacturing applications. Early in this year's audit, you discover that Mayberry-Cleaver has changed its method of determining inventory from LIFO to FIFO. Your client's expectations is that FIFO is consistent with the method used by some other companies in the industry. Upon further investigation, you discover an executive stock option plan whose term calls for a significant increase in the shares available to executives if net income this year exceeds $44 million. Some quick calculations convince you that without the change in inventory methods, the target will not be reached; with the change, it will. 2a. Do you perceive an ethical dilemma?

2b. What would be the likely impact of following the controller's suggestions?

2c. Who would benefit?

2d. Who would be injured?