Italo legge un libro giallo in giardino.

In Italian most descriptive adjectives—especially colors, shapes and sizes—follow the noun they modify.
• libro giallo = “yellow book”
• If you put giallo before, it often becomes poetic or emphatic.

Literally, yes: giallo = “yellow.”
However, in publishing jargon un giallo also means “a mystery novel,” because early mystery paperbacks in Italy had yellow covers.

Because libro is a masculine singular noun, and the speaker is not referring to a specific book.
• Masculine singular → un (a/an)
• If it were feminine singular (e.g. casa), you’d say una casa.

Everything agrees with libro (masculine singular):
• Article: un (masc. sing.)
• Noun: libro (masc. sing.)
• Adjective: giallo (masc. sing.)
For plural books you’d say dei libri gialli (masc. pl.).

Legge is the third-person singular present indicative of leggere (“to read”).
• Italo (he) → legge (he reads)

In indicates location “inside” or “within” an area. With generic or habitual locations, Italian often omits the article:
• in giardino = “in (the) garden” (speaking generally)
If you want a specific garden you’d say nel giardino (“in the garden”), using nel = in + il.

Replace Italo (proper name) with the subject pronoun lui (he):
• Lui legge un libro giallo in giardino.

Yes.
• Italo legge un libro in giardino.
This simply omits the detail about the book’s color (or genre).