It creates an acronym from any phrase by combining the first letter of each word in uppercase.
When checked, it skips small words like "a," "the," and "of" when building the acronym, except it never skips the very first word even if it is a small word.
Yes, it is checked by default since acronyms conventionally skip minor connecting words.
Yes, entering a full name like "National Aeronautics and Space Administration" will generate its acronym from the first letters of each significant word.
No, punctuation attached to words is ignored when extracting the first letter of each word.