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LIFO reverse is the difference between the inventory value through LIFO method and inventory value through any other method. The account that records these differences is called LIFO reverse account. LIFO reverse account is maintained to get the LIFO effect (Difference in LIFO reverse account between two periods).

In the given case, the LIFO adjustment or LIFO reverse is $40,000. This shows that without LIFO, the inventory was valued at a lower cost than the LIFO method. So under LIFO reporting, the inventory is adjusted by $40,000 with a LIFO adjustment account or LIFO reverse account.

Under LIFO method, the cost of goods sold is valued at the current prices. Thus the Cost of goods sold would be higher under LIFO than any other method. This higher cost is due to the inflationary effect. Because of this inflationary effect in cost, net profit would be lower and ultimately tax would be calculated on the lower income.

In the given example, LIFO adjustment has been made in the operating income under LIFO method. This has reduced taxable income by $40,000, and so the tax has been saved by $14,400.

In the given example, the cash flow without LIFO method is $160,000. But there is a tax saving of $14,400 under the LIFO method. This tax-saving has been adjusted in the $160,000 amount to get the cash flow of the LIFO method.

Ideally, this amount may not be correct. Because the cash flow under LIFO has been computed based on adjustment, the actual cash flow may be lower if computed from the LIFO perspective.

The company that uses LIFO has tax savings due to the higher cost of the inventory or LIFO adjustment. This tax-saving drives extra cash flow for LIFO than any other method of inventory valuation.