(hd0,0)/grub/splash.xpm.gz
is located within the /grub/
directory at the top-level (or root) of the (hd0,0)
partition (which is actually the /boot/
partition for the system).
kernel
command is executed with the location of the kernel file as an option. Once the Linux kernel boots, it sets up the root file system that Linux users are familiar with. The original GRUB root file system and its mounts are forgotten; they only existed to boot the kernel file.