The options in the server specify what is allowed, for example in your case it's saying that WAV->FLAC and FLAC->FLAC are allowed. To decide between the two it looks at the type of player in use and decides based on it's preference. An SB3 prefers FLAC first, then WAV, then MP3. So your WAVs will be encoded to FLAC on the server and then decoded back to PCM on the SB3. This is good because it saves bandwidth on the network which makes the wireless streaming more reliable. If you don't want that to happen (for example if you want to save CPU on the server) disable the WAV->FLAC option.
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