That's pretty much bob-on what The_Artist presented for us.
The only part I would challenge is why Cloud started to weave Zack's exploits into his own version. It is my thoughts that Cloud was embarassed at not making SOLDIER, but also due to the effects of the Mako treatments he managed to convince himself that it really did happen to him.
As we see later in the game, straight from the off it appears that Tifa is fully aware of Cloud's deception but perhaps is fearful of telling the truth to Cloud in case it affects Cloud mentally.
- S
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