They know that words can be put together in sentences to tell a story. Much of beginning reading is memorization of the words and short sentences used in a story. Words are repeated. Sentences are short. Rhyming words are used to help children increase vocabulary.
Clues are abundant in the pictures.
After several readings with the parent, the child should be able to read alone. If the child can't, it's better not to pressure. So what you are basically doing is helping your child associate his speaking language with the written language of a book. And between four and five the child will have the 2000 word speaking vocabulary necessary for reading. Both the understanding of spoken and written language stem from the same area of the child's brain.