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Notes to the
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27 Notes to consolidated cash flow statement

a. Reconciliation of operating profit to net cash inflow from operating activities
  2004   2003
restated
All figures in millions Continuing Discontinued Total   Continuing Discontinued Total
a. Reconciliation of operating
profit to net cash inflow from
operating activities
Total operating profit 218 13 231   204 22 226
Share of operating profit of
joint ventures and associates
(8) (2) (10)   2 (2) -
Depreciation 95 7 102   104 7 111
Goodwill amortisation and
impairment
215 9 224   251 6 257
Increase in stocks (26) (1) (27)   (8) - (8)
Increase in debtors (10) (5) (15)   (93) (3) (96)
Increase/(decrease) in creditors 47 3 50   (71) 3 (68)
Decrease in operating provisions (15) - (15)   (20) - (20)
Other and non-cash items (10) - (10)   (44) 1 (43)
Net cash inflow from operating
activities
506 24 530   325 34 359
Dividends from joint ventures
and associates
9 1 10   8 1 9
Purchase of tangible fixed assets (118) (7) (125)   (94) (11) (105)
Capital element of finance leases (2) - (2)   (3) - (3)
Sale of tangible fixed assets 4 - 4   8 - 8
Add back: cash received relating
to acquired deferred income
- - -   42 - 42
Add back: non operating capital
expenditure
1 - 1   2 - 2
Add back: integration costs 4 - 4   8 - 8
Operating cash flow 404 18 422   296 24 320
Operating tax paid (43) (12) (55)   (11) (23) (34)
Operating finance charges (88) 3 (85)   (79) 3 (76)
Operating free cash flow 273 9 282   206 4 210
Non operating tax received/(paid) 10 - 10   (10) - (10)
Integration costs (4) - (4)   (8) - (8)
Total free cash flow 279 9 288   188 4 192
Dividends paid (including
minorities)
(196) (1) (197)   (189) (18) (207)
Net movement of funds from
operations
83 8 91   (1) (14) (15)
Acquisitions of businesses and
investments
(45) (1) (46)   (108) (3) (111)
Disposals of businesses,
investments and property
18 24 42   (4) 56 52
New equity 4 - 4   5 - 5
Purchase of own shares (10) - (10)   (1) - (1)
Other non operating items (1) - (1)   - - -
Net movement of funds 49 31 80   (109) 39 (70)
Exchange movements on net debt 78 (3) 75   104 13 117
Total movement in net debt 127 28 155   (5) 52 47

Note Operating cash flow, operating free cash flow and total free cash flow have been disclosed as they are part of Pearson's corporate and operating measures. Tax payments that can be clearly identified with disposals, integration and exchange differences taken to reserves are allocated as non operating tax payments. In 2003 cash received relating to acquired deferred income is an adjustment in Pearson's operating cash flow to match pre acquisition cash received with post acquisition revenue recognised following the acquisition of London Qualifications and more accurately reflect the substance of the transaction. A contra entry to this adjustment is included in 'Acquisitions of businesses and investments'.

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b. Analysis of net debt
All figures in millions Cash Overdrafts Sub-total Short-term deposits Debt due within one year Debt due after one year Finance leases Total
b. Analysis of net debt
At 31 December 2003 309 (23) 286 252 (552) (1,347) (5) (1,366)
Exchange differences (5) 2 (3) (9) 37 50 - 75
Other non-cash items - - - - - - (1) (1)
Net cash flow 67 (37) 30 (1) 466 (415) 2 82
At 31 December 2004 371 (58) 313 242 (49) (1,712) (4) (1,210)
At 31 December 2002 417 (77) 340 158 (172) (1,734) (7) (1,415)
Exchange differences 6 31 37 9 (40) 111 - 117
Other non-cash items - - - - (459) 458 (1) (2)
Net cash flow (114) 23 (91) 85 119 (182) 3 (66)
At 31 December 2003 309 (23) 286 252 (552) (1,347) (5) (1,366)

Note Finance leases are included within other creditors in the balance sheet (see note 20).

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c. Reconciliation of net cash flow to movement in net debt
All figures in millions 2004 2003
c. Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the year 30 (91)
(Increase)/decrease in net debt from management of liquid resources (1) 85
Decrease/(increase) in net debt from other borrowings 51 (63)
Decrease in finance leases 2 3
Other non-cash items (1) (2)
Exchange differences 75 117
Movement in net debt in the year 156 49
Net debt at beginning of the year (1,366) (1,415)
Net debt at end of the year (1,210) (1,366)

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