The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between current-year and past-year (minus inflation) inventory costs. This gap is: With LIFO Without LIFO Revenues $6,500,000 $6,500,000 Cost of goods sold 4,800,000 4,800,000 Operating expenses 300,000 300,000 Operating income 1,400,000 1,400,000 LIFO adjustment 100,000 0 Taxable income $1,300,000 $1,400,000 Income taxes @ 40% $520,000 $560,000 Cash flows $880,000 $840,000 Extra cash $40,000 0 Increased cash flow 5% 0%

Explain how the cash flow of $880,000 in this example was computed. Explain why this amount may not be correct.