Final answer:
A self-liquidating asset is one that converts to cash within a specified short-term period, typically a year, helping balance the asset-liability time mismatch on a business's balance sheet. The correct option is B.
Step-by-step explanation:
The concept of a self-liquidating asset refers to an asset associated with a product or service that is expected to convert into cash within a short time frame, typically within one year. This includes the idea that all the product will be sold, receivables collected, and bills paid over the time period specified without the need for long-term financing. The term implies a financial strategy where the current assets used in the production and sale of a product generate the funds needed to pay off the current liabilities that were created to procure those assets. An example of a self-liquidating asset would be the inventory of a retail store that is sold, and from which proceeds are used to pay suppliers and other operational expenses.
On a balance sheet, the assets and liabilities associated with a business's operation are listed, and the management of these figures is crucial to maintaining a healthy asset-liability time mismatch. This mismatch occurs when, for instance, customers can withdraw a bank's liabilities in the short term while customers repay its assets in the long term, such as with loans. Assets that do not self-liquidate within an expected time frame can contribute to this mismatch, which can be a risk for the financial stability of a business or financial institution. In contrast, self-liquidating assets assist in maintaining a balanced and more predictable cash flow, reducing the likelihood of financial strain due to mismatched assets and liabilities.