My daughter is 5, in kindergarten, and is "going through the process" right now. Some kids in her class can read, some cannot, and I expect my daughter will be reading by the end of the school year. Right now, she knows her letter sounds and she can sound out a word (most of the time) if she works very hard at it. She knows very few "sight words" (her name and that's about it). She is very typical for her age in terms of her reading skills.
I also had the experience with my niece where we were reading a book together, and she knew all the words and I thought she was reading until I took too long to turn the page and she kept on going. She was 2 at the time. My daughter has never done this: she doesn't memorize words much, but she can flip through a book and tell the story in her own words.