Shepard Company has not yet prepared a formal statement of cash flows for 2010. Comparative balance sheets as of December 31, 2010 and 2009, and a statement of income and retained earnings for the year ended December 31, 2010, 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 2010 using the direct method in the Operating Activities section.

December 31 Current assets U.S. Treasury bills (six-month) 1 Accumulated depreciation Liabilities and Owners Equity Total current liabilities Term notes payable-due 2014 Common stock outstanding Total liabilities and owners' equity $1,235 Shepard Company Statement of Income and Retained Earnings For the Year Ended December 31, 2010 (thousands omitted) Sales $1,416 Less expenses and interest: Cost of goods sold Salaries and benefits Heat, light, and power Depreciation Property taxes Patent amortization Miscellaneous expense Interest 5990 195 70 40 20 45 Net income before income taxes Income taxes Net income Retained earnings-January 1, 2010 S 52 12 S 40 115 Stock dividend distributed Retained earnings-Decmber 31, 2010 20 5 135