Shepard Company has not yet prepared a formal statement of cash flows for 2014. Comparative balance sheets as of December 31, 2014 and 2013, and a statement of income and retained earnings for the year ended December 31, 2014, appear below and on the following page.

Required
1. For purposes of a statement of cash flows, are the U.S. Treasury bills cash equivalents? If not, how should they be classified? Explain your answers.
2. Prepare a statement of cash flows for 2014 using the direct method in the Operating Activities section.

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Shepard Company Balance Sheet December 31 (thousands omitted) Assets 2014 2013 Current assets: $ 75 Cash U.S. Treasury bills (six-month) 25 125 Accounts receivable 200 Inventory 525 500 $ 775 $ 725 Total current assets Long-term assets: $ 100 Land Buildings and equipment 510 450 (150) Accumulated depreciation Patents (less amortization) (190) 90 110 $ 510 $ 490 Total long-term assets Total assets $1,235 $1,265 Liabilities and Owners' Equity Current Liabilities: $ 370 $ 330 Accounts payable Current assets: Taxes payable Notes payable 10 20 300 400 $ 680 $ 750 Total current liabilities Term notes payable-due 2018 200 200 $ 880 $ 950 Total liabilities Owners' equity: Common stock outstanding Retained earnings $ 200 $ 220 115 135 $ 355 $ 315 $1,265 Total owners' equity Total liabilities and owners' equity $1,235 Shepard Company Statement of Income and Retained Earnings For the Year Ended December 31, 2014 (thousands omitted) Sales $1,416 Less expenses and interest: Cost of goods sold $990 Salaries and benefits 195 70 Heat, light, and power Depreciation Property taxes 40 Patent amortization 20 Miscellaneous expense Interest 45 1,364 Net income before income taxes 52 Income taxes 12 Net income 40 Retained earnings–January 1, 2014 115 $ 155 Stock dividend distributed 20 Retained earnings-December 31, 2014 $ 135 ETTH %24