The receiver can (not likely) add some unwanted distortion to the image.
You are correct in both what you want to do and what will actually happen.
You expected that because the receiver passes s-video through it and composite video that it would transcode (convert) from composite (yellow cable) to s-video.
That was an incorrect assumption, and while some receivers do this, unless it specifically advertised, it is not a 'standard' feature.
So, you can run your video from your DVD player via composite instead and then have everything connected via composite video if you want things to be simple for your family. Or, you can get a composite to s-video adapter from Parts Express or perhaps Radio Shack for under 20 bucks which will convert the vcr output to s-video. It won't improve the quality of the image from the vcr though.
A better option in my opinion would be to get a Harmony universal remote control and spend a few hours programming it online. This will allow your family one touch control of the television. The remote will switch the TV and the A/V receiver to the correct inputs automatically and will also correctly give you remote control over the device that is currently selected.
Then, just hook your VCR up to your receiver (or TV) and hook the DVD player up to the receiver (or TV) and use one remote to do all the extra thinking so you don't have to explain it over and over again to friends.
My remote has a button that says 'CABLE' - press it, and you are watching cable. It has another button that says 'DVD' - guess what happens when you press that?
Cuz' I have a cool remote it also has a button that says: Current mode: PLASMA Switch to projector? When you press that button, the plasma turns off, the screen drops out of the ceiling, and the button changes and says: Current mode: PROJECTOR Switch to plasma?
Don't overly concern yourself with the connections. Do concern yourself with getting a decent universal remote.
