An ISO file, often called an ISO image, is in fact an "image" of an entire CD or DVD. The entire contents of a disc can be perfectly represented in a single ISO file.
You can think of an ISO file like a box that holds all the parts to something that needs built - like a child's toy you might buy that requires assembly. The box that the toy pieces come in does you no good as an actual toy but the contents inside of it, once taken out and put together, become what you're actually wanting to use.
It's practically the files that go on a cd, but not on a cd.