The file extension determines the file types such as *.jpg, *.doc, *.rar, etc. Allowing yourself to view the file extension make it easier to change the file type. For example you can change a *.jpg image file to bitmap by changing the extension to *.bmp
However in most cases Windows default settings does not always reveal the file extension and it needs to be set manually from the Folders settings in the Control Panel page.
How to show file extension in Windows XP Desktop/Folders.
Go to Start>>Control Panel>>Folder Options
In View tab un-tick the "Hide extensions for Known file types". To hide it just tick it instead.