Doing a factory reset will delete all your game files/data/DLC and PSN Account. It's basically set back to it's original factory settings. I have a PS3 Slim and I done it once before because I had a corrupted system file. And it was completely wipe out. So I had to relog in and download my DLC from the PSN.
When should I restore my default settings and what does this do?
During certain troubleshooting situations, it may be necessary to restore all of the PlayStation 3 system settings back to their original default configuration. Do not confuse this feature with the "Restore PS3 System" option. "Restore PS3 System" will also delete all hard disk content. (You will lose all saved content from your PlayStation 3 system's hard drive if you use "Restore PS3 System").
The "Restore Default Settings" feature will only restore all of the following settings (and erase any previously saved settings):
Date and Time Settings
Internet Browser Settings
How do I restore Default Settings on my PlayStation 3?
From the top level of the PlayStation 3 Home Menu, go to Settings> [System Settings] > [Restore Default Settings].
Once you select [Restore Default Settings], you will see a list of settings that will be restored. Scroll through them and pressto restore the settings.
After the operation is complete, you will see the initial setup screen that appeared the first time you turned on the PlayStation 3 system. You will need to go through the initial setup process before you can use the PlayStation 3 system.