I always have a interface that all my classes extends; it holds a update and render method. All my classes have the ability to render or update something. I then call the update and render methods in my main gameloop. Graphics are rendered and then I update the positions before doing it all over again. I would be against your 2nd bullet point, I think your code would get way to dependent on its self, and if you change one thing, you'll screw it all up. I would look into OOP, I think games really benefit from it. You are also correct on your 3rd point, you need to make separate classes for everything. You need a base sprite class for all of your sprites to have one common place to operate from. So, your Player class would extend Sprite, your Enemy class would extend Sprite, etc. If you try to throw everything into the same class, you will again clutter your classes up way to much, and I guarantee you you will have some very buggy code on your hands!

It's actually just updating/rendering, the two extra parts are just descriptive text but I guess they looked more like their own step. I'm somewhat bad at drawing diagrams. 

Thanks for the replies.

I just thought up another question to ask after I did a few tests with inheritance which I've never used before. If I have a base Sprite class and all of the other Sprite classes inherit from it, what should I put in the base Sprite class?

I did a test to see if I could do this before I asked. I made two classes, one was Entity and the other was Player, and in the Entity class I created a variable 'public int testInt = 1;'; after that I had Player extend Sprite and then made a constructor method for each class, in both constructors was the statement 'System.out.println(tempInt);'. When I tested the classes by calling both of the constructors they both printed 1 to the console. Because of this I thought that it wouldn't be possible to use a Sprite class for something such as holding all of the variables.

The way that I thought it would work is if Player extended Entity then player would create it's own instances of all of the public variables in the Entity class without me having to specificly create them.