Zwei Kinder sitzen im Sandkasten und spielen mit einer Schaufel.

Because zwei Kinder is the subject of the sentence: the two children are the ones doing the action.

In German, plural nouns usually have:

• no extra ending in the nominative plural: die Kinder
• often an -n ending in the dative plural: den Kindern

So here:

• Zwei Kinder sitzen ... = Two children are sitting ...

You would only get Kindern in a dative plural context, for example:

• Ich helfe zwei Kindern. = I help two children.

Because the subject is plural: zwei Kinder.

German verbs change depending on the subject:

• ich sitze
• du sitzt
• er/sie/es sitzt
• wir sitzen
• ihr sitzt
• sie sitzen

Since zwei Kinder = they, the correct form is sitzen.

The same applies to spielen:

• Zwei Kinder ... spielen ...

German often uses the simple present where English uses the present progressive.

So:

• Zwei Kinder sitzen ... can mean Two children sit ... or, more naturally in English, Two children are sitting ...
• ... und spielen ... = ... and are playing ...

German does not usually need a special form like are sitting. The normal present tense is enough.

Im is a contraction of in dem.

• in dem → im

So:

• im Sandkasten = in the sandbox

This contraction is extremely common in German:

• im Haus = in the house
• im Garten = in the garden

You could theoretically say in dem Sandkasten, but im Sandkasten is the normal choice.

Because this sentence describes location, not movement toward a destination.

German uses in with:

• dative for location: in dem / im Sandkasten = in the sandbox
• accusative for movement into something: in den Sandkasten = into the sandbox

Here the children are already there:

• Zwei Kinder sitzen im Sandkasten.

Compare:

• Die Kinder gehen in den Sandkasten. = The children go into the sandbox.
• Die Kinder sitzen im Sandkasten. = The children are sitting in the sandbox.

Because the preposition mit always takes the dative case.

The noun Schaufel is feminine:

• nominative: eine Schaufel
• dative: einer Schaufel

So:

• mit einer Schaufel = with a shovel

This is a very important pattern:

• mit einem Kind (neuter)
• mit einem Mann (masculine)
• mit einer Schaufel (feminine)
• mit Kindern (plural)

Usually it means a shovel here.

The word eine can sometimes mean one, but in this sentence it is just the normal indefinite article. In the dative feminine form, eine becomes einer.

So:

• mit einer Schaufel = with a shovel

If German wanted to strongly emphasize the number one, the context or stress would usually make that clear.

Because the same subject, zwei Kinder, applies to both verbs.

German, like English, often leaves out the repeated subject when it is the same:

• Zwei Kinder sitzen im Sandkasten und spielen mit einer Schaufel.

This is just like English:

• Two children are sitting in the sandbox and playing with a shovel.

You could repeat the subject, but it would sound unnecessary:

• Zwei Kinder sitzen im Sandkasten und sie spielen mit einer Schaufel. That sounds much less natural.

In a normal German main clause, the finite verb comes in second position.

So the sentence structure is:

• Zwei Kinder = position 1
• sitzen = position 2
• im Sandkasten = the rest

Then after und, the second verb phrase continues:

• und spielen mit einer Schaufel

So the basic pattern is:

• Subject + finite verb + other information

German word order can vary, but this sentence uses the most straightforward, neutral order.

Schaufel usually means shovel, spade, or scoop, depending on context.

In a sandbox context, it most naturally means a toy shovel/spade used for playing in sand.

So a learner should understand it as something like:

• a shovel
• a small spade for sand

Because und is simply connecting two coordinated verb phrases:

• sitzen im Sandkasten
• spielen mit einer Schaufel

In standard German, you normally do not put a comma before und when it joins equal elements like this.

So:

• Zwei Kinder sitzen im Sandkasten und spielen mit einer Schaufel.

That matches English pretty closely.

Yes, that is the most natural reading.

Because the sentence says mit einer Schaufel (with a shovel), it suggests they are playing using one shovel. It does not explicitly say each child has one.

If you wanted to say they each had shovels, you might say something like:

• ... spielen mit Schaufeln. = ... are playing with shovels.
• ... spielen jeweils mit einer Schaufel. = ... are each playing with a shovel.

Yes, it is a very common German compound noun.

It is made of:

• Sand = sand
• Kasten = box

So literally, Sandkasten means sand box, which matches the English word sandbox.

German forms many nouns this way by combining smaller words into one larger word.