Final answer:
The statement is false, as the sales budget typically initiates the preparation of a master budget, influencing the production and subsequently the inventory purchases budget.
Step-by-step explanation:
The statement that a company must know how much inventory is on hand before it can determine how many items must be purchased, and therefore the inventory purchases budget is normally the starting point in the process of preparing a master budget, is False. In the preparation of a master budget, the starting point is usually the sales budget. The sales budget dictates how many units of a product are expected to be sold, which then influences the production budget. The production budget, in turn, determines the inventory purchases needed to meet the anticipated sales demand, after considering the inventory on hand. Therefore, the inventory purchases budget is derived from the sales and production budgets, not the other way around.
The statement is true. The inventory purchases budget is indeed the starting point in the process of preparing a master budget. The master budget is an important financial planning tool that outlines the company's projected revenues, expenses, and financial goals for a specific period, typically a year. To accurately prepare the master budget, the company needs to know the amount of inventory it has on hand, as this information influences the quantity of items that need to be purchased.For example, let's say a retail company wants to prepare its master budget for the upcoming year. It needs to consider how many items it currently has in stock and estimate the demand for its products based on sales projections, market trends, and customer behavior. By knowing the inventory on hand, the company can determine how many additional items it needs to purchase to meet the projected demand and ensure sufficient stock levels.