To report a user, select the "report" option in the dropdown menu when selecting the offending user in the room's user list. Select a reason for the report from the dropdown list and any additional information that you think is necessary and hit send.
Alternatively, if a user is broadcasting, use the report button in the top-right of the user's broadcast window when hovering over it. This will open the same report dialog.
When reporting another user, it will send a notification to a site administrator or moderator. A report will include information on both yourself, the user you are reporting, as well as why you are sending the report. It will additionally contain the current visible chat log of the user sending the report and a screenshot of the reported user's webcam, if they are broadcasting.
A report will be received on an administration dashboard, as well as via email to administrators and moderators. They can then, assuming the report is valid in any way, respond by with bans, cam closures or harsh words.
If someone is violating the terms of service, then it is a valid reason to report someone. Such examples could include nudity or explicit images on a cam, posting of personal information in chat or threats of violence or otherwise harrassing a user.
Reporting should not be used to prank people, to try and remove people you don't like from a room, or just for funsies. If someone is annoying you on cam, you can close or mute them. If someone is not following any sort of room rules, it should be taken up with a room mod.
Reports should be sent as a last resort, as they will be received by site mods who would rather not have to respond to petty room issues or bogus reports.