Q: When you run the canned reports (such as Project Burndown or Cumulative Flow) and select a Backlog Group. Does it include all the stories that are in a sub-Backlog Group? In other words, does it roll up the data from Backlog Groups that are underneath the one selected in the report?
A: It will include the workitems that are assigned to the child backlog groups as well.
"Does it include all the stories that are in a sub-Backlog Group?"
There is not a way to have it only show the single level backlog group in reporting because of the way the relationships are built.