The description in about:flags says:
If the PPAPI version of Flash is in use, run it in each renderer
process rather than in a dedicated plugin process.
The PPAPI documentation says:
There are two modes of operation, "trusted" and "untrusted" plugins. Untrusted plugins use the Native Client to safely run code from the web and is cross-platform. Trusted plugins are loaded directly in either the renderer process or a separate plugin process as platform-specific libraries.
So, I think if the PPAPI version of Flash is in use, enabling the option you ask about will run Flash as a trusted PPAPI plugin in the renderer sandbox rather than as untrusted code in a separate process running in a NativeClient sandbox.
If that's correct, flash is isolated by sandboxing from the rest of your computer either way, which means it's harder for bugs in flash to, for example, cause web sites to be able to read your files. I believe neither mode of sandboxing attempts to isolate websites from one another (in general, multiple websites use a given renderer process). Running in the renderer process does mean that bugs in flash have more of a chance to cause tabs to crash, rather than just flash plugin rectangles. Presumably the option is there as a performance enhancement (some performance improvement should come because there is no interprocess communication overhead if flash is running in-process).
I think chrome (but not chromium) comes with PPAPI Flash, and enabled for use, by default.
None of this should affect firefox.