I feel like when you're dealing with time travel and parallel universes it's always going to be a bit wonky and trying to make sense of it is usually pointless.
The question for me is not "does it make sense" it is "does it make for a good story".
In the case of ff7 re: in some places it works in some places it doesn't. Whether the characters are actually aware of the events of the original or not (i think they are or at least Sephiroth is) there is a clear metanarrative going on regarding the original game. That's either going to be your bag or not.