Indicate how each of the following six different transactions that Dynamic Mattress might make would affect (I) cash and (ii) net working capital:

Paying out a $2 million cash dividend.
Paying $5,000 previously owed to one of its suppliers.
Borrowing $1 million long-term and investing the proceeds in inventory.
Borrowing $1 million short-term and investing the proceeds in inventory.
Selling $5 million of marketable securities for cash.

You need to start with what accounts each of these transactions would affect. If one of the accounts is cash, then of course it affects cash. Since working capital is current assets minus current liabilities, you also need to look at whether any of the accounts involved is one of those: current asset or liability.

The affect on cash should be easy to figure out since you can just take that quite literally. (Did you get cash in, or pay it out?) The affect on working capital is actually not too difficult since it's a subtraction. But if you don't "get" how it would affect it, make up some beginning balances and then see how it would be changed.

Just as a simple example, let's say you purchased supplies for cash. That would a) increase your supplies, a current asset, and b) decrease the cash, a current asset. So first, yes it affects cash by reducing it. Also, both accounts are current assets, so you also need to look at the affect on working capital. The liabilities are not affected since neither account is a current liability. Both are current assets though. However... one current asset goes down and the other current assets goes up, in equal amounts. Meaning the balance of the current assets do not change. Therefore, working capital does not change.

Let's say instead that you purchased the supplies on account. Well now we affect a) supplies by an increase, and b) accounts payable by also increasing. So we know cash is not affected in this case. How about working capital? Supplies is a current assets and would increase. Accounts payable is a current liability and would also increase. So now you have an increase in both. It actually has no affect on working capital, but if you need to do the math to see this, then make up numbers:

Let's say current assets were $1000 and current liabilities were $700. You have a working capital of $300.

If the supplies purchased on account were $100, then current assets increases to $1100 and current liabilities (accounts payable) also increases by $100 to $800. $1100 - 800 still equals $300. No change.

Try this and see if you can figure these out.