Audio streams can be passed through in one of two methods.
S/PDIF has a limited amount of bandwidth for which the audio can pass through the cable. When an audio signal is uncompressed (i.e. no compression used), it uses more bandwidth than when it is first compressed before sending it through an S/PDIF cable. Unfortunately an S/PDIF cable can not carry more than a two channel (i.e. stereo) audio signal when the audio is uncompressed. Therefore multichannel audio that is uncompressed (eg. video games) must be passed as stereo. If an audio signal is a compressed format (eg. Dolby Digital in movies), it can support more than two channels (up to 5.1 channels). The audio device that receives the audio signal will then uncompress the compressed signal and create the appropriate channels based on the source.