ABSTRACT
This chapter discusses the most important trends in accounting and capital theory, crucial for measuring the quality of earnings. It also includes an overview of the concepts of earnings from the point of view of different accounting theories. It offers a discussion of the concepts of measurement of earnings, focusing on two of them, i.e. the concept of profit as an increase in the wealth of owners (the concept of comprehensive income or all-inclusive income) and the concept of profit as a measure of performance of a company and its management (the concept of current operating performance). The choice between the current operating performance concept and the comprehensive income concept is a dilemma as to which of them is a better, more perfect measure of economic profit and, at the same time, a better basis for holding managers accountable for the resources entrusted to them. The selection of the concept is crucial in relation to the valuation method that should be applied in the entity considered, which involves choosing between historical cost and fair value. This is followed by a discussion of the impact of the most prominent theories of finance and economics on accounting. There is also a discussion of the principal-agent problem and of its impact on financial reporting. The chapter addresses the impact of signalling theory as well as information asymmetry on financial reporting. Further on, it stresses the importance of the hypothesis of information efficiency of capital markets and the capital asset pricing model, whose significance determines the research on the role of financial reporting in capital markets. The chapter deals also with the modern portfolio theory and the arbitrage pricing theory and their impact on financial reporting.
