If we use SoundFlower to record the system's audio output, then we can't hear it at the same time?
No. You can still hear the sound by creating a new audio device in Audio MIDI Setup. Go to the SoundFlower menu and click "Audio Setup". Audio MIDI Setup should popup up. Create a new multi-output device (click the + in the bottom left hand corner). Then set the settings as pictured below:

This will allow you to capture the system sound and still hear it through your speakers/headphones.