Notes to the
Accounts

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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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