[David L.]

2. Then there is no continuing story if your teacher did not stipulate this. It is an observation, made at some time in the past; so on those grounds, there is no need to change the tense.
Your teacher is suggesting that the continuous form of the tense sets the background to start a story, but a story could be written in either form. The continuous form does suggest to the reader, though, that because of the continuous form of the tense, more details or action about the dog is about to happen. eg '...was playing around. It ran round and round a tree and then suddenly ran right under the spray of the hose. How that dog dripped! Bad dog, Fido." See (5) for more on continuous tense.

5. Look at the difference between " I go to school" and "I am going to school"
'I go to school' means that I attend school (I don't have a job). It is what I do each day.
"I am going to school" is the present continuous of this, and is used when the writer is talking about something that is unfinished or incomplete. If is as if a neighbour spoke to me as I walked along, and asked me what I was doing. I am in the process of going to school, but I am not there yet. What I am doing is not finished until I actually arrive at school.
'I am going to school and still have six blocks to walk."

4. There has been a reference to 'cars' but not to any colour car.
"There are two cars parked outside. One is a yellow car, the other is a red car. The yellow car is a Ford."
compare
"There are two cars parked outside. The cars have been there all night. One is a yellow car."
compare
"There is a car parked outside. It is a yellow car."