What exactly is an image, and what is it for?

In exact audio copy, instead of just ripping the tracks from a CD to WAV files, you have the option of ripping an image of the cd with a CUE(?) sheet. Apparently, the image just takes all the tracks on the CD and makes them into one huge WAV file.

What exactly is the point of this and under what circumstances would one use it? And what is that CUE sheet for?

One large file is best used for Mix CDs etc.
The CUE file holds the data for the individual tracks. Through this file you can burn the image back on CD with all the track markers intact.

When you rip individual tracks and burn them using (for example) Nero, it is possible to end up with gaps between tracks, which is not what you want in a Mix CD.

Hope this clarifies things a bit.