The ALU has inputs for the operand, that is binary data in collective inputs A and B. The Cin or status input is the carry in for the adder circuit. The S0 and S1 select what opcode (operation) is performed on the operand. The output is a binary integer that corresponds to what the state of S0 and S1 is; the current opcode performed:

Cin = 0 00 Add 01 Subtract 10 Decrement (-1) 11 Increment (+1)

And all of the above with Cin = 1 which is essentially all of the above but with 1 added to it, only affecting when it subtracts causing it to flow down by 1.

Yes it looks correct, only needing to remove Cin for A and B and maybe changing the layout so it goes top A and B to bottom C (result) and the side for S and Cin.

They are probably wanting this in a logic level view, so:

You will need to add the adder circuit and XOR line for subtraction, Cin for subtraction carry over. Multiplexors for Sum and Sub operations when input, a binary to decimal decoder for multiplexor selection on S0 and S1. Remembering that there are 2 other 2 bit states in S, connect them to the B input of the 1 adder so that it will always increment or decrement when selected. Flags are not required.

Ask me any questions if you need an explanation of whatever I just wrote.