"Lossy" audio formats like MP3 and AAC compress data by removing less important parts of the audio. If an audio signal contains two very similar frequencies, one of which is much louder than the other, that play at the same time, your ear is essentially unable to hear the quieter frequency. Additionally, the human ear can perceive only those sounds that fall within a certain frequency range—approximately 30Hz to 20,000KHz. While lossy compression removes these less perceivable frequencies, lossless formats like WAV retain all the frequencies present in the original audio.
Because a WAV file is an uncompressed lossless rip of the original signal, it is a perfect copy of the audio. It is essentially impossible to tell the difference between audio playing from a CD and audio playing from a WAV rip of the same CD, even on the highest-end stereo system. WAV is the highest-quality format to which you can rip a CD; as such, it can be useful for creating an archive of your music collection. WAV files are also "future-proof": no matter what music file format becomes dominant in the future, you'll be able to convert WAV files into that format.
The high quality of a WAV rip also means that its file size is extremely large. One minute of audio encoded in the MP3 format, for example, uses approximately 1MB of hard drive space. A minute of WAV audio, on the other hand, is approximately 10MB in size—10 times larger than an MP3 of the same length. These large file sizes may make it impractical to rip a large music collection to the WAV format. Additionally, many portable media players do not support the WAV format: if you want to listen to music while you're away from your computer, you'll need to convert the WAVs to a different format.
Compressed lossless formats provide a compromise between the high quality of WAV and the small file size of MP3. The Free Lossless Audio Codec, for example, compresses audio data in such a way that it can be perfectly reconstructed during playback, while having a smaller file size than a comparable WAV file. The Monkey's Audio lossless APE format compresses audio to an even smaller file size than FLAC, although its compression speed is significantly slower. The Apple ALAC encoder, which comes included with iTunes, can also create a compressed but lossless rip of a CD.