Retreat 
Does a unit retreat when a single flag is rolled on the unit and the attached leader is hit and eliminated.
The unit must retreat, seeing your leader parish would no doubt shake up the most veteran unit.
Does every hex in a retreat have to be closer to the retreating unit's baseline?
Yes.
If both hexes directly behind a unit are occupied, may the unit retreat one hex to the side and then two hexes to the rear?
No. Retreat path must always be backward.
Does an enemy leader alone in a hex block my unit's retreat?
Yes. When moving a unit you may not move onto or through a hex occupied by an enemy unit or lone enemy leader.
What does ignore one flag mean?
Each time the unit is being targeted in battle, it may ignore one flag. When the unit can ignore more than one flag, for example it has a leader attached and is supported, it may ignore two flags each time it is attacked.
When retreating can a unit that has no attached leader retreat into a hex with a friendly leader?
Yes. A unit, without an attached leader, may retreat onto a hex that contains a friendly leader that is alone on a hex. The leader attaches to that unit, and the unit's retreat movement is stopped and the unit ignores any additional retreat movement.
The rules state a flag will cause a retreat equal to the movement allowance of the unit. That's seems like a lot? A light cavalry with 2 flags will be going off board for sure.
You are correct, 2 flags (8 hex retreat) will normally send a light horse unit to the edge of the battlefield, where it will lose one block for each hex the unit cannot retreat. But remember when being attacked, the light horse unit may choose to evade. Only symbols that match the evading unit will score a hit, flags and swords are a miss. One last point, you really need to keep units in support, especially cavalry units on your flanks, to avoid an entire flank from running.
How do you handle a cavalry or chariot versus the elephant on a retreat?
Horse or chariot unit that must retreat because an elephant unit rolled a flag against it moves back 1 additional hex for each flag. For example, a light horse must retreat 5 hexes when an elephant unit rolls a single flag against a light cavalry unit that cannot ignore a flag.