Lesson 10: Determining Profit and Loss (2024)

Lesson Materials

• Calculators
• Crayons or Colored Pencils
• Index Cards
• Pencils
• Worksheets for lesson plan 10 (see sidebar)

Making Connections

Ask students to explain the terms profit and loss. What is a profit and what is meant by a loss? As a class, brainstorm some possible definitions. Explain that a profit is when a business makes money after expenses. It is the revenue that remains after all expenses and costs have been paid. A loss is the opposite. It is when a business does not make money or a profit after deducting all expenses and costs. The business is losing money. The goal of a business is to increase profits and reduce losses.

Discuss with students that it is important for store owners and businesses to know whether they are profitable or not. As a class, brainstorm several reasons why understanding profits and losses are important.

Some possible responses may include the following:

• To understand if the store is making money
• To understand what specific store products are making money and which may be losing money
• To reduce expenses if needed
• To change product pricing to increase revenue
• To plan for future purchases including inventory and other expenses associated with running the business
• To understand if the store can afford future investments (e.g. increasing store space, hiring more help, upgrading computer systems etc.)

Next, divide the class into pairs and identify the income and expenses for a lemonade stand. Have the class answer the following questions:

• How would you determine the income for lemonade sales?
• What expenses are associated with having a lemonade stand?

Use the following chart for guidelines and to review team responses:

Exploring and Learning

1. Explain that an important accounting tool is the profit and loss statement. This is a financial statement that helps to keep track of a business. It includes gross income, cost of goods sold, expenses, and net income. Review the following definitions with the class:
   • Gross income is income generated from sales. It is the price of a product multiplied by the quantity sold. For example, if a store sold only beaded necklaces and each necklace cost $5.00 each, the gross income would be the number of necklaces sold multiplied by the $5.00 price per necklace.
   • Cost of goods sold is the cost of selling goods or items during a specified period of time. The cost of goods sold is the opening merchandise inventory plus purchases made during the period less the closing merchandise inventory.
   • Expenses include selling, administration, and operating expenses. Expenses specifically may include rent, salaries, and advertising.
   • Net income is gross income minus the cost of goods sale and expenses. This is the profit made on sales. If the cost of goods sold and expenses are greater than the gross income, the business had not made a profit. The business would record a net loss.
2. The profit and loss statement must be accurate because it helps a business make important decisions. The goal of a business is to increase profits. Ask students to work in pairs to prepare simple profit and loss statements for a lemonade stand:
3. Pair students together and provide each group with the Lemonade Stand Income and Expense Information (PDF), the Lemonade Stand P&L Statements (PDF), and Lemonade Stand P&L Analysis (PDF). Review the assumptions listed on the Lemonade Stand P&L Statements with the class before each team works independently to complete the P&L statements.
4. Explain and list on the board or as a transparency the following instructions:
   • Review the Lemonade Stand Income and Expense Information.
   • Complete the Lemonade Stand P&L Statements by calculating gross income, total expenses, and net income.
   • Calculate the profit margin percentages for each P&L.
   • Answer the questions listed on the Lemonade Stand P&L Analysis worksheet.
5. Review the five lemonade profit and loss statements as a class. Use the Lemonade Stand P&L Statements Key (PDF) and the Lemonade Stand P&L Analysis Key (PDF) for answers.
6. Present students with the following scenario:

   RG and Hannie are working at the Raymond Geddes Elementary School Store. Sniffer has asked them to complete and analyze the January, February, and March school store profit and loss statements.

   Can you help RG and Hannie prepare and analyze the statements for the three month period?

7. To help complete the scenario, pair students together and provide each group with the following: ul class="bluecheck">

8. School Store P&L Statements (PDF)

   These statements are based on Appendix G of The School Store: An Operating Manual by Geddes, located on the Geddes website at http://www.raymondgeddes.com//.

9. Pencils and calculator

Review the following assumptions:

• The school store has a simple P&L. Income less cost of goods sold equals profit.
• Income from sales is not affected by returns. All sales are final at the school store and returns are not allowed.
• The school store is run by volunteers. There are no administrative costs or operating costs.
• The school store is set up on a cart which is rolled into the cafeteria. The store uses little space and inventory is held in a closet. There are no rental space expenses.