Shimano Nexus 3 speed
 

I just bought a cruiser bike to ride around with the family and it has the gearing inside the rear hub. I should have test ridden it before bringing it home because it clicks when you pedal, like the sound of spinning free wheel. It's kinda of annoying and I'm wondering if that is normal. I'm wondering if it was installed incorrectly.

If the yellow indicator is between the lines on second gear, then you're good. The clicking is normal.

Epicyclic hubs(like your three speed) often have more than one ratchet assembly in them. You will get a click when coasting as well as a slower paced clicking in two of the three other gears while pedaling.

All is well. You are hearing the sound of the hub shell outrunning the ratchet pawls on the planetary carrier in gears two and three. All three speed hubs do that, whether SA, Shimano or Sram.
Dan Burkhart
www.boomerbicycle.ca