When I say this
using (Entities db = new Entities())
{
    return db.TableName.AsQueryable().ToList();
}
Do I by-pass the functionality of using block since I return something, and the method exits before exiting the using block, so I think the using block will not serve to its purpose and dispose the resource.
Is this correct?
You are incorrect; it will be disposed.
The using statement compiles to a try / finally block that disposes the original object in the finally block.finally blocks are always executed, even if the code inside the try block returned a value or threw an exception.
using statement will call Dispose of db object before value returning.
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