Stefnuljósið virkar.

Because Icelandic very often writes compounds as a single word.

Here, Stefnuljósið is built from:

• stefnu- = direction/course
• ljós = light
• -ið = the

So the whole word means something like the directional light, which in normal English is the turn signal or the indicator.

English usually prefers separate words, but Icelandic often packs the same idea into one compound noun.

-ið is the definite article, meaning the.

So:

• stefnuljós = a turn signal / turn signal
• stefnuljósið = the turn signal

Unlike English, Icelandic usually attaches the to the end of the noun instead of putting it as a separate word in front.

In Icelandic compounds, the first part often appears in a special compound form, very often related to the genitive form.

So stefna becomes stefnu- in this compound.

You do not need to translate that piece literally every time; it is best to learn stefnuljós as the normal word for turn signal / indicator.

It is neuter.

A very useful rule in Icelandic compounds is:

• the last element usually determines the gender

Since ljós is neuter, stefnuljós is neuter too.

That matters for things like:

• the form of the suffixed article
• adjective endings
• pronouns used with the noun

It is in the nominative, because it is the subject of the sentence.

In Stefnuljósið virkar, the turn signal is the thing doing the action of working/functioning.

So:

• Stefnuljósið = subject, nominative
• virkar = works/functions

A small complication: for many neuter nouns, the nominative and accusative look the same, so you identify the case here mainly from its role in the sentence.

Because virka means to work / to function, and virkar is the present tense, 3rd person singular form.

So:

• ég virka = I work/function
• þú virkar = you work/function
• hann/hún/það virkar = he/she/it works/functions

Since stefnuljósið is a 3rd person singular subject, the verb is virkar.

Important: the verb agrees with person and number, not with gender. So masculine, feminine, or neuter singular subjects all take virkar in the 3rd person singular.

Not quite.

In this sentence, virka means to function / to be in working order. It is commonly used for machines, devices, systems, lights, phones, and similar things.

So Stefnuljósið virkar means:

• The turn signal works
• The indicator is working
• The turn signal functions

But if you mean to work at a job, Icelandic usually uses vinna, not virka.

Here it is singular: the turn signal.

A useful thing to know is that stefnuljós can be tricky because the indefinite form may look the same in singular and plural in some cases.

Common forms are:

• stefnuljós = turn signal / turn signals
• stefnuljósið = the turn signal
• stefnuljósin = the turn signals

So the definite ending helps make the number clearer.

A rough learner-friendly pronunciation is:

STEP-nu-lyoh-sith VIR-kar

A few notes:

• Stress is on the first syllable: STEF-
• ljó is roughly like lyoh
• ð in -ið is the Icelandic letter eth, a soft th sound
• r in virkar is usually tapped or rolled lightly

This is only an approximation, but it is a good starting point.

Yes, but Stefnuljósið virkar is the normal straightforward statement order:

• subject + verb

If you make it into a yes/no question, you would typically switch the order:

• Virkar stefnuljósið? = Does the turn signal work?

Icelandic also has verb-second word order, so in other contexts another element can come first, but the finite verb still tends to stay in second position:

• Núna virkar stefnuljósið. = Now the turn signal works.

So the sentence you were given is the basic neutral statement form.