Ferro Derailleur problem

I recently got a Ferro for my daughter. She loves it and wants to maintain it properly, so she decided to clean and lube it. While cleaning, she somehow got the chain to come loose. She tried to fix that, but the the chain just became very tangled with multiple "loops". I tried to correct the issue but was stymied. I removed the rear wheel and got the chain off the derailleur sprockets, and was able to detangle the chain - yay!

But now, I don't see how to thread the chain through the derailleur. I removed the sprockets to untangle the chain, but did not do anything else with/to the derailleur. In fact, it looks like the derailleur is totally in the wrong place. With the bike upside down, it attaches to the frame just slightly behind and above the rear axle, and it is at an angle of about 35 degrees right of the vertical center line. Again, the bike is upside down.

All the derailleurs I've ever seen (granted, not many, but even in internet images) have the derailleur directly below (above with an upside down bike), or in front of, the axle. So when the chain exits the second sprocket it wraps around a gear in the cassette. With the position of the derailleur as it is on this bike, the chain can contact only a few teeth of any given gear. Check it out:

In fact the metal frame that houses the sprockets is actually touching the first (largest) gear, in the yellow circle below. You can also see that the chain is not fully engarged with the second sprocket, and is actually catching on the chain guide of the second sprocket.

From what I can see, all would be well if the deraillure was over, or just forward of, the rear wheel axle. That is, if the derailleur was rotated counter clockwise at its attachment point. But the mount is clearly meant to be where it is - it has a spur that engages a notch on the frame. See 2nd pic above in the yellow rectangle.

For comparison, here is waht is shown in the manual that came with the bike:

Can someone please tell me what I'm missing here?? My daughter wants to get back on her bike! 😁

Thanks for any help ...