Similar example with a photograph. http://www.digital-photography-school.com/crop-factor-explained
It means the sensor the image is focussed on is smaller than a full frame, 35mm film equivilent. The image from the lens is effectively cropped giving the effect of a longer focal length. Lenses still show the standard length so you will need to multiply what it says on the lens by the crop factor, 1.6 for canon crops, so 100mm on a lens will be the equivilent of a 160mm lens on a full frame camera.
The viewfinders take this into account and still show what you will get in the photograph.
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