When I was a kid I learned how to knit alongside my mom, who made me beautiful scarves, mitts, and even sweaters and shawls (she still does, and I get compliments all Autumn long on my beautiful accessories - thanks Mom!)
I want to teach my kids, since I took to it pretty easily at about 6 or 7.
So I started digging around and I found this awesome tutorial over on imaginationsoup.com
I love those big chunky needles and actually I adore that rainbow wool. This site suggests knitting a small blanket for a doll, but I think kids are capable of knitting an entire scarf. Obviously it won't be perfect, but with the chunky knits it's a little more forgiving. Something like this...
By the way, I found this awesome site about arm knitting! I had seen finger knitting of course but never this.