What would have been the effect on the statement of financial position if the inventories had been sold on 7 March for £3,500 rather than £8,500?

The statement of financial position on 7 March would then have been:

Celestial Goods Statement of financial position as at 7 March

ASSETS	£
Cash at bank (18,000 + 3,500)	21,500
Machinery	12,000
Inventories (8,500 – 8,500)	–
Total assets	33,500

EQUITY AND LIABILITIES	£
Equity (22,000 + (3,500 – 8,500))	17,000
Liabilities – borrowing	12,000
Liabilities – trade payable	4,500
Total equity and liabilities	33,500

As we can see, the inventories (£8,500) will disappear from the statement of financial position, but the cash at bank will rise by only £3,500. This will mean a net reduction in assets of £5,000. This reduction represents a loss arising from trading and will be reflected in a reduction in the equity of the owners.