Read the case study below and answer the questions that follow.

Case 1: Nau: The Ups and Downs of a Start-up

In 2005, several individuals with experience in the outdoor clothing industry met at Portland's

Urban Grinds coffee shop to sketch out their new retailing concept. Their idea was to combine

the eco-friendly and mountain-climbing style of Patagonia Clothing Company with the fashion-

forward urban cool of Prada Designs. Not only would their clothes be practical on the trail, but

they would look sleek and trendy in the city as well. The firm to be named Nau (pronounced

now), would design its own fabrics with new sorts of eco-friendly materials. Even Nau's retail

outlets?the business plan called for 150 of them?would be constructed from recycled wood

and plastic. The team also decided to donate 5 percent of sales to worthy non-profit organisations

that buyers would choose. The clothes would be pricey, but shoppers would feel good knowing

that by buying a $40 T-shirt or a $350 jacket, they would also be supporting a charitable cause.

Chris would be the firm's CEO and Ian would become its marketing chief. Formerly, Chris and

Ian had worked as marketing executives at Patagonia and Nike, respectively. Mark, recently a

top Patagonia designer, would be the lead designer for Nau.

The founders' timing was impeccable, or so it appeared. The green movement was in full swing,

and a booming economy was giving rise to a sort of mass philanthropic movement. But Nau also

had its eye on running a successful business. Stores would be about half the size of typical

specialty apparel stores, with tiny inventories, representing a huge cost saving. To make these

small stores work, Nau would offer shoppers a 10 percent discount at the register in exchange for

Nau's shipping clothes from its warehouse directly to their homes. Customers went wild when

the first three stores were opened in March 2007 in Portland, Oregon; Chicago, Illinois; and

Boulder, Colorado.

The founders intended for Nau to be more than merely another clothing company?they wanted

to make meaning (make a difference)

We're a small group of people committed to using the power of business as a force for

change...seeking to balance the triple bottom line: people, planet and profit. We believe that

doing good and doing good business is one and the same thing. We only deserve to exist if our

products and our practices are capable of contributing to positive, lasting and substantive

change. Our goal: To demonstrate the highest levels of citizenship in everything we do: product

creation, production, labour practices, the way we treat each other, environmental practices and

philanthropy. We believe that companies have a broader responsibility than simply generating

profit. That's one reason we're blending profitability and philanthropy, what we believe is the

new measure of success.

As an example of Nau's uniqueness, company bylaws prohibited any Nau executive from

earning more than 12 times what the lowest-paid U.S. worker earned.

In planning for a successful venture, Nau's management believed that a key factor would be its

design philosophy:

We believe great design has enormous power and we're trying to use it to change the world, one

sustainable fabric at a time. Our design philosophy is built on the balance of three criteria:

beauty, performance and sustainability. Far from mutually exclusive, the integration of these

concepts defines a new standard for apparel. Many people make exceptional clothing that

embraces one of those criteria. A select few manage to combine two of the three, at the most

exacting levels. As far as we know, no one has made a dedicated effort to integrate all three with

unflagging commitment to each.

The Nau team wasted no time ramping up. Among its moves: investing in an IT infrastructure

powerful enough to handle $250 million in annual revenue and striking deals with fabric makers

in the United States, Hong Kong and elsewhere in Asia. By the end of 2007, Nau had opened an

additional five stores and had started construction of another four. To finance the company's

growth, the management raised an amazing $35 million from private investors.

While the company was experiencing phenomenal growth, troubles soon began surfacing. On

May 2, 2008, with little, if any warning, a statement on the company's website announced that

the company would be shut down. The announcement read: "Good bye for Nau," blaming a

"highly risk-averse" capital market for the shutdown. "We simply could not raise the necessary

funds to continue to move forward," the statement read. "We believe this is not so much a

reflection of the viability of our business, but the result of an unfortunate confluence of events."

All the stores were closed, and the firm's 95 employees were dismissed.

Nau's leadership had assumed that additional financing would be available for future growth.

Then the credit crunch hit. With no recourse to bank financing, the team implored its biggest

investors for additional funding. But the investors who had been so generous just a few months

earlier were no longer interested in investing more money in the business. "Everyone on the

board understood we had gone in too far to turn around and pare this thing down," said Gomez,

then board chairman of Nau. The money was gone. The board voted to close down Nau's stores

and suspend all business.

Nau's management was stunned. The day after the closure, Ian and Mark contemplated life

without Nau and felt a deep emptiness. "We had poured everything into this," said Ian. "I just

could not believe it would end?and end so quickly." Mark looked over his designs and

wondered how well they would have sold. "We had only one season to get traction," he said. "If

we had just one more season, we would have been OK."

After the board put Nau into liquidation, Chris organised a buyout effort to acquire the Nau

brand and its website. His plan was to relaunch Nau. Ian and Mark, like Chris, also remained

committed to seeing the Nau brand and what it represented continue. "We recognised there was

incredible value in the product and in the brand," said Ian.

In addition to Chris', efforts, Ian and Mark set out to find a buyer who would keep the business

going. They first went about preserving business relationships. "We called up factories," said

Mark. "They agreed to hang on for a period of time to see if something could be resurrected." To

attract a buyer, they decided they would need to overhaul Nau's business plan, which they

realised had been too idealistic and ambitious. Rather than attempt to ramp up a huge number of

stores, they decided that Nau should grow slowly and organically. They also blamed themselves

for how they had run the company. They could have gone into wholesaling. The website could

have been stronger. Perhaps they had overextended themselves by offering too many styles. No

aspect of the business was left unexamined.

After dozens of inquiries, Ian and Mark got the attention of Gordon, the CEO of Horny Toad, a

large casual clothing line in Santa Barbara, California. They felt Horny Toad's outdoor image

could be a good fit for Nau. They also liked linking the Nau brand to the back office support and

infrastructure of a successful apparel maker.

Gordon's initial reaction was lukewarm: "I still wasn't clear about how we could help."

However, after visiting Nau's headquarters, Gordon liked what he saw. He offered to purchase

Nau, trumping Chris' bid and several other bids. Gordon also agreed to hire Ian and Mark, who

would continue in the same positions.

QUESTION ONE

a) What were Nau's founders' primary motivations for founding Nau? [6 Marks]

b) What is your opinion of management's decision to give a percentage of the firm's sales to

charity? Describe the pros and cons of such a decision [6 marks]

c) Describe Nau's competitive advantage. Do you think it is sustainable? [6 Marks]

d) What mistakes do you believe Nau's management made in executing their strategy?[4

marks]

e) There are a number of factors that Nau considered before deciding what kind of financing

to go for. Identify and describe 4 such factors relevant to the business model [4 Marks]

f) Do you believe it was a wise decision for Nau to partner with Horny Toad? Give reasons

for your answer. [4 Marks]

Case Study Required a) Identify the problems with the statement of cash flows that the accounting clerk prepared. CS-1 LO Z Granite Surfaces specializes in making granite countertops. A new accounting clerk has compiled the following information to prepare the statement of cash flows for the year ended December 31, 2018. Net income for the year was $114,140. Depreciation expense was $15,300. Equipment was sold for a gain of $16,000. Cash proceeds from the sale were $36,000. Equipment was purchased for $250,000. Dividends of $50,000 were paid. Accounts receivable increased by $31,400. Merchandise inventory decreased by $38,700. Accounts payable increased by $41,100. b) Prepare a corrected statement of cash flows. Notes payable increased by $55,000. Stock was sold for $50,000 (also its book value). Cash balance on January 1, 2018 was $114,800. Cash balance on December 31, 2018 was $117,640. The statement of cash flows the accounting clerk prepared is shown below. Granite Surfaces Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flow from Operating Activities Net Income $114,140 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities Depreciation Expense 15,300 Changes in Operating Assets and Liabilities Increase in Accounts Receivable 31.400 Decrease in Merchandise Inventory (38,700) Increase in Accounts Payable 41,100 Sale of Equipment 36,000 Purchase of Equipment (250,000) Net Cash Provided (Used) by Operating Activities ($50,760) Cash Flow from Investing Activities Proceeds from Notes Payable 55,000 Net Cash Provided (Used) by Investing Activities 55,000 Cash Flow from Financing Activities Payment of Cash Dividend (50,000) Proceeds from Issuance of Common Stock 50.000 Net Cash Provided (Used) by Financing Activities Net Increase (Decrease) in Cash 1,240 Cash at the Beginning of the Year 114.800 Cash at the End of the Year $119.040problems. It is an innovative and structured approach to encourage collaboration across government, business, philanthropy, academia, universities, nonprofit organizations and citizens to achieve significant and lasting social change. IWP is not funded which remains a major challenge. Core activities: capacity building as well as mapping of stakeholders and their programs; dissemination of news and (co)-organization of symposia and workshops; connecting and engaging people for collaboration ( i.e. in the national plan of action) The Portuguese Marine Litter Association: The Portuguese Marine Litter Association (APLM) Country: Portugal National Size and Structure: 11 persons; General assembly, management team and representatives of other departments Finance: Not funded regularly, occasional small donations Vision, structure and core activities: APLM was founded in November 2013. Its vision is to preserve the environment against the impacts of litter on marine ecosystems, including estuaries and rivers. APLM aims at preventing and reducing marine litter through a combined set of actions at different levels of organization in the private and public sectors. It promotes co-responsibility and behavioral change among stakeholders from government agencies