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# Lesson 10: Determining Profit and Loss

• Lesson Title: Determing Profit and Loss
• Lesson Length: Approximately 2 days
• NCTM Standard: Algebra

#### Learning Objectives

1. The student will understand profit and loss, components of a simple profit and loss statement, and the importance of a profit and loss statement.
2. The student will calculate profits using gross income, total expenses, and cost of goods sold.
3. The student will analyze monthly profit and loss statements for a school store and calculate profit margin percentages.

#### Connection to Bloom’s Taxonomy

• Comprehension
• Application
• Analysis
• Synthesis

## 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:

Lemonade Stand Profit and Loss Components

Income Components

Possible Expenses

Price

Number of cups of lemonade sold

Bottled water if not using tap water

Container for mixing and serving powdered lemonade

Spoon or spatula to mix powdered lemonade

Cups

Poster board for sign

Marker for sign

Table

Tape to attach sign to table

## 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.
1. Explain and list on the board or as a transparency the following instructions:
• Calculate the Total Merchandise Available, the Cost of Goods Sold, and the Gross Profit On Sale for each month.
• Calculate the Profit Margins (as a percentage) by dividing the Gross Profit on Sale by the Income from Sales.
• Answer the questions to complete an analysis of the school store P&Ls.
2. Review the School Store P&L Statements as a class. Use the School Store P&L Statements Key (PDF) for answers.

## Extended Learning and Practice

1. Ask students to interview a parent or other adult about a business they work for or own and ask students to share their findings with the class.
• How does the company make a profit?
• Is it a service provider or a business that sells merchandise?
• What expenses are associated with the business?
2. Invite a local business owner to your classroom to discuss his or her business. Ask the business owner to share information about what the business does, how it makes money, how prices are set, and what expenses they have.

## Assessment

The lesson objectives can be assessed by evaluating the Lemonade Stand P&L Statements (PDF), Lemonade Stand P&L Analysis (PDF), and School Store P&L Statements (PDF) with Lemonade Stand P&L Statements Key (PDF), Lemonade Stand P&L Analysis Key (PDF), and School Store P&L Statements Key (PDF).

Use the Assessment of Student Progress (PDF) to evaluate students’ overall abilities to meet the lesson’s learning objectives, which include understanding and explaining profit and loss; identifying components of a simple profit and loss statement; explaining the importance of a profit and loss statement as a financial tool; calculating profits using gross income, total expenses, cost of goods sold, and profit margin percentages; and analyzing monthly profit and loss statements for a school store.

## Closure

Provide each student with an index card and have them answer the following questions on one side of the card:

1. What are two new things that you have learned?