FLAC stands for Free Lossless Audio Codec. Lossless means that no quality is lost during compression, hence a file compressed into FLAC has every single bit of the original data, despite a smaller size. Lossy formats, such as MP3 for example, eliminate permanently certain audio data and reduce the quality of sound. In this way 85 MB WAV file converted to 192 kbps MP3 sheds 74 MB of information.
Where does all this data go?
Well, most of it is simply discarded and precision of remaining audio components reduced. Most evident loss of information occurs in the low and high frequencies range. So bass loses its intensity and instruments with a lot of high frequencies such as bells or cymbals sound "sandy" and dim. Just imagine what a huge amount of information you miss listening to MP3 in 192 kbps while original bitrate is 1411 kbps (Kilobits Per Second).
You can say that MP3 refers to FLAC as
this image:
refers to this: 
In other words, listening to MP3 is like looking at the first image. You can get a general idea of what the original is like, but you can't experience and enjoy it fully.
What's the difference between WAV and FLAC ?
WAV is uncompressed and FLAC is compressed. You can compress WAV to FLAC the same way you can compress TXT to ZIP. It's the same quality, just a smaller file. For example 60 MB WAV file compressed to FLAC becomes only 35 MB.
So how come the data is not lost in FLAC?
Well, think of a big text file. You can reduce its size in two ways.
1. By deleting some lines and paragraphs.
2. By encoding it into certain code that uses less bits e.g. Zipping or Rarring it.
Mp3 works with the first method, Flac works with the second.
Here's a little illustration of compression code that uses less bits :
Uncompressed data: **** ^^^^^ ♦♦♦ ♂♂♂♂♂ ••••
Compressed data: 4* 5^ 3♦ 5♂ 4•