Am I understanding this correctly?

I am looking at a cambridge audio id100 dock for my iPod. When I connect my iPod i then use either a toslink or spdif output to my dhc 9.9 receiver and its internal dac would process this or just pass it thru? i am considering a dacmagic dac also and then would be balanced or unbalanced input to dhc 9.9. i am on a budget so would consider other options. someone recommended the pure i20 but the reviews were pretty mixed. goal is to use iPod into system. thanks.

Joe in Mobile