Abstract:

The paper includes a research on possibilities of earnings quality assessment and putting the results into the relationship with the most widely used traditional financial ratios as a return on assets, profit margin or total assets turnover ratio. The concept of the earnings quality measurement techniques represents relatively new, and an under-research field. The most significant researches are the one conducted by DeAngelo (1986), Jones (1991), Dechow & Dichev (2002) in which authors develop models for measuring discretionary and non-discretionary accruals that represent an earnings quality proxies. The purpose of those models is to detect levels of management choices that affect the financial result of the company. The conducted research gives results on modified Jones (1991) and Dechow & Dichev (2002) models by using the sample of large Croatian companies for a nine-year period. Next to determining the level of discretionary accruals, the paper includes correlation results between the accruals proxies and traditional financial indicators. The most significant part of the paper includes results about the differences between accruals level in the ‘loss’ and ‘profit’ companies. The obtained results show that there are more management choices (manipulations) in the ‘loss’ observations, and that ‘profit’ observations are more affected by business conditions (non-discretionary accruals).