Statement of Cash Flows—Direct Method Shepard Company has not yet prepared a formal statement of cash fl ows 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 fl ows, are the U.S. Treasury bills cash equivalents?

If not, how should they be classifi ed? Explain your answers.

2. Prepare a statement of cash fl ows for 2010 using the direct method in the Operating Activities section.

Shepard Company Balance Sheet December 31 (thousands omitted)
Assets 2010 2009 Current assets:
Cash $ 50 $ 75 U.S. Treasury bills (six-month) 25 0 Accounts receivable 125 200 Inventory 525 500 Total current assets $ 725 $ 775 Long-term assets:
Land $ 100 $ 80 Buildings and equipment 510 450 Accumulated depreciation (190) (150)
Patents (less amortization) 90 110 Total long-term assets $ 510 $ 490 Total assets $1,235 $1,265 Liabilities and Owners' Equity Current Liabilities:
Accounts payable $ 370 $ 330 Current assets:
Taxes payable 10 20 Notes payable 300 400 Total current liabilities $ 680 $ 750 Term notes payable—due 2014 200 200 Total liabilities $ 880 $ 950 Owners’ equity:
Common stock outstanding $ 220 $ 200 Retained earnings 135 115 Total owners’ equity $ 355 $ 315 Total liabilities and owners’ equity $1,235 $1,265.

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 $990 Salaries and benefi ts 195 Heat, light, and power 70 Depreciation 40 Property taxes 2 Patent amortization 20 Miscellaneous expense 2 Interest 45 1,364 Net income before income taxes $ 52 Income taxes 12 Net income $ 40 Retained earnings—January 1, 2010 115 $ 155 Stock dividend distributed 20 Retained earnings—December 31, 2010 $ 135.

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