_____ sind denn die Kinder gelaufen?
a) Wohin b) Wo
Is it true that both choices can be used here? "Wohin" would mean "Where have the children run to?", and "wo" would mean "Where did the children run?"
Yes. It's true.
Wo asks for a position and needs the dative case
Wo sind die Kinder gelaufen?
Hinter dem Baum.
Wohin (=nach wo) asks for a direction and needs the accusative case
Wohin sind die Kinder gelaufen?
Hinter den Baum.
Apart: the opposite to wohin is woher (=von wo), asking for the origin. Of course, you need to take another verb then.
Woher sind denn die Kinder gekommen?
Yes, although a) is clearly wanted in your case, "Wo sind die Kinder gelaufen?" does make sense as well (Where did the children run? In the park. On the track. In the gym.)