Document editing on the ipad

It is not clear to me how the file system in iOS 8 works. Consider e.g. the Dropbox app, when I open a document in another app, what happens?

It looks to me as:

1. copy of the file is created


2. file handle to the copied file is passed to the other app


3. other app edits the file


4. other app keeps the file

A few question regarding this:

1. Is this how it works?


2. Where is the new file stored?


3. Does iCloud work the same way?

This seems rather messy, as I just want an app that can edit e.g. pdf documents IN Dropbox.