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Explanation:
A is correct. A consumption asset is a non-investment asset. Since the company will consume the asset as opposed to generating an investment return on it, it is a consumption asset. Copper held by an electrical component manufacturer will be used/consumed in the production process rather than held for investment purposes.
B is incorrect. This is an example of an investment asset. The rental property generates an investment return through rental income.
C is incorrect. This is an example of an investment asset since the municipality is not planning on consuming the gold but uses the ETFs to generate an investment return by periodically liquidating portions to fund operations.
D is incorrect. This is an example of an investment asset since the land and the facility are not consumed by the manufacturer; they are used as productive assets to generate business income.
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Question 90: A risk manager at a bank is explaining various types of assets to a junior analyst. The risk manager discusses the characteristics of financial, non-financial, investment, and consumption assets and gives examples of each. Which of the following is the best example of a consumption asset?
A
A stockpile of copper owned by an electrical component manufacturing company
B
A single-family residential rental property that generates a 5.5% annual return in rental income
C
A position in gold ETFs that a municipality periodically partially liquidates to fund its ongoing business operations
D
The land and a manufacturing facility owned by a company that uses them for its primary business