lost iphone 5 with passcode, help

There is no way to access the files unless you can log into the iCloud account.

1. Can they gain access to my pictures and files by jailbreaking it?

No, jailbreaking just removes hardware restrictions on iOS.

2. How can I double check or confirm that indeed my 'find my iphone' was set up on my lost iphone?

If you see your phone listed under All Devices on Find My iPhone, it's on the phone.

3. If they put in a new sim card and reset the phone, will it bypass the passcode and gain access to my files?

No. If Find My iPhone's Activation Lock was turned on, the IMEI of the phone is stored in Apple's servers. When they try to reset it, it will still ask for your iCloud password.

4. Is there a way that they can go online (wifi or cellular data) given that it has passcode?

If the phone is reset, all they can do is connect to Wifi or cellular during the setup. Once it does connect, it will end up asking for your passcode again.

Q: They need to know my 4 digit passcode on the lockscreen before it can be reset right?

A: No, they can put the iPhone into recovery mode to bypass the lockscreen passcode. But once they restart it, the iPhone will ask for the password for your iCloud account, so they won't get past that.

Q: Lastly, in case there are ways to reset it without needing to know the 4 digit lockscreen code and they reset the phone, can I still track it using find my iPhone?

A: Possibly, yes, since it would reconnect to the network. But honestly, I don't see the value in still trying to locate it. If the thieves have it, I wouldn't try to get it back without the police, and they might not be willing to get involved. It's also possible for someone to gain access to your iCloud account (although unlikely) and delete the device. Personally, I would put the phone into Lost Mode on iCloud.com, and move on.

EDIT: Here's a recent example of someone who waited to erase their phone through iCloud and discovered someone had logged in and deleted it: iPhone 6 stolen and Apple ID hacked in China