If a DOCX, PPTX, or XLSX file is embedded as an object in a DOCX, PPTX, or XLSX template (any combination), that embedded template will be processed as a sub-template, applying the same datasources and passing in all tag vars in scope. That is then included in the generated report. This is illustrated in this video.
The key point to keep in mind here is that you can put tags in the embedded object and they will be populated with data in the generated output. Sometimes providing an embedded worksheet is much more powerful than a static table in Word. Especially if it has formulas in it.