These questions have actually already been discussed in-depth on this forum. A search might be helpful.
In short, that alert is misleading because it does not actually remove any music that is already on the device as long as that music is in the cloud. To listen to music when out of range of a Wi Fi signal you will need to pre-download tracks to the device. Also, any music ths has already been listened to will still be available on the device because it is stored in a non-permanent cache.
With iTunes Match enabled on an iOS device traditional syncing of music via USB is disabled. All music management takes place directly on the device.