1) A Cash Flow Diagram refers to cash flowing in or out of the company’s pocket. Thus if the company borrows money from a bank (the lender) it goes into the company’s pocket (+) and if they pay out money by either paying off some of the principal or paying some interest, it comes out of the company’s pocket (-).
The loan can reflect whatever you and I agree to, but if we agree that it is a simple annual interest loan, you are agreeing to pay me only the interest owed for the money you borrowed during the previous compounding period, at the end of the year (compounding period). Thus he is saying that you have agreed to pay me any and all interest due at the end of each year. Further, you can pay down the loan (pay off some of the principal) should you wish to do so, which according to the problem, you intend to do.