Shepard Company has not yet prepared a formal statement of cash flows for 2012. Comparativebalance sheets as of December 31, 2012 and 2011, and a statement of income and retained earnings for the year ended December 31, 2012, 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 2012 using the direct method in the Operating Activities section.

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Shepard Company Balance Sheet December 31 (thousands omitted) Assets 2012 2011 Current assets Cash U.S. Treasury bills (six-month) Accounts receivable Inventory $ 50 75 200 500 $ 725 775 25 125 525 Total current assets Long-term assets Land Buildings and equipment Accumulated depreciation Patents (less amortization) $ 100 80 450 510 (190) 90 (150) 110 $ 510 490 $1,235 $1,265 Total long-term assets Total assets Liabilities and Owners' Equity Current Liabilities Accounts payable 370 330 Current assets Taxes payable Notes payable 10 300 20 400 $ 680 750 200 $ 880 950 Total current liabilities Term notes payable-due 2016 200 Total liabilities Owners' equity: Common stock outstanding Retained eanings $ 220 200 115 $ 355 315 $1,235 $1,265 135 Total owners' equity Total liabilities and owners' equity Shepard Company Statement of Income and Retained Earnings For the Year Ended December 31, 2012 (thousands omitted) Sales Less expenses and interest: $1,416 Cost of goods sold Salaries and benefits Heat, light, and power Depreciation Property taxes Patent amortization Miscellaneous expense Interest $990 195 70 40 20 45 1,364 S 52 12 $ 40 115 S 155 20 $ 135 Net income before income taxes Income taxes Net income Retained earnings-January 1, 2012 Stock dividend distributed Retained earnings-December 31, 2012