Translation:That cat was sleeping when we arrived.
Yes, that is correct. But as you might already know, we structure all our sentences in only 1 tense, the present tense. So even though it's in continuous tense (in English sense), in Indonesian, you need to switch it into present tense. Therefore, the word 'sedang' is optional. You can use it when you feel like you need to stress on the ongoing action..
Sorry for my bad english.
The english translation here is terrible. It should be "the cat was sleeping when we arrived". Or, "the cat was asleep on our arrival. I have to assume this is due to using american english grammar which is very different from english (England) grammar proper and for learning purposes.