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Insert Picture using Word's menu (or Copy/Paste)
The image by default will be added "in line" with your text, which may look awkward. Change the wrapping (or not), depending on how you want to situate the image in your text.
In line (image added between paragraphs):
Layout Options for text-wrapping: "square" is a good choice.
Last: after you have the image where you want it, right click the image, then click on Insert Caption. You can do the equivalent of a parenthetical citation (possibly along with a descriptive caption), or you can place the image citation in the caption. If you include the full citation here, you do not need to have it in your Works Cited.
The caption is basically just a textbox (one that can auto-number itself). Click into the box to highlight the text to make edits to what's written there or the font appearance.
E.g. it may not be necessary to number the figures! The caption window won't let you get rid of it altogether, but it can be deleted manually after you OK the caption and it is in your document. Double-click the number in the caption box to select it, then backspace or delete to remove.
Notice the "1" is missing from the right image, which was present in the left version.