A. If you're following some instructions that say to wipe it, do it.
B. It's completely harmless to wipe it.
C. It's for apps and the java VM compiler (Dalvik to be specific) so that they run faster. It'll recreate the cache for each application when you run them next time.
I am not 100% sure, but I am fairly certain the Dalvik cache (Dalvik is the name of the Java VM for Android, what most apps run on) is basically a bytecode cache of an application after it's processed by Dalvik.
Long story short, once an app is cached in that way, it should have faster startup times and such.