I'm currently using the internal sound card of my motherboard which is connected to my AVR via optical cable.
In that case, you're good to go.
- Do I need a dedicated sound card?
No and no. Your AVR DAC is doing the work, and undoubtedly doing it just fine.
- Which Audio formats are considered as good sources, i.e I know MP3 is considered to be bad, FLAC is supposed to be good but which FLAC quality should I use and what other formats are also good?
FLAC is FLAC. It's lossless compressed, so it's as good as CD. MP3 quality depends on the bitrate you use. iTunes and Amazon sell music encoded at 256 kbps. At that bitrate, you would be very, very hardpressed to hear any real difference between that and the original CD. Use FLAC if you've got the disk space, otherwise use MP3.
- Does different audio player softwares make a difference? I use WinAmp.
Generally this is more about convenience and capabilities than sound quality.
- Which cables should I use for the connections between PC and AVR.
The one you're using now.
- Does wireless streaming lower the audio quality compared to cables?
Not as long as your wireless method can transmit lossless audio, which something as simple as an Airport Express does.
Finally, will quality CD players or even turntables produce much better quality audio than what I can achieve with my PC + proper hardware (like DACs)?
No—and you already have the proper hardware.