Of course Mrs. Puff would use SpongeBob's name when talking to Flats. After everything he's put her through, she probably thought he was a blessing to come along and threaten him. It's also likely that she's just using the situation she walked in on at the end to get back at SpongeBob for causing her trouble for so long.
Given how serious Flats is about kicking SpongeBob's butt, and how much Gary and SpongeBob are shown to care about each other (in that season, anyway), Gary pulling out a camera when SpongeBob tells him not to watch is a bit out of character... unless you consider that Gary has been shown multiple times to be among the smartest characters in the show, and probably already knows that SpongeBob isn't in any danger.
As bad as the Cruel Twist Ending may seem, SpongeBob will be just fine. The episode establishes he can’t be hurt, so Mrs. Puff can’t do anything to him and will collapse in exhaustion just like Flats.
Just One Bite
Earlier episodes present Squidward as a Lethal Chef, who's cooking at the Krusty Krab is either disgusting or burnt to a crisp. That's because he's never tasted one, and doesn't know how a Krabby Patty is supposed to be good. Not only that, but since the Patties he was force-fed in "Your Shoe's Untied" were launched down his throat, he ate them, but didn't taste them!
When arguing with SpongeBob, Squidward criticizes the latter's claim that Krabby Patties are "good for you", calling it a "heart attack on a bun", to which SpongeBob explains that he means that they're "good for your soul"; note that SpongeBob did not say that Squidward was wrong about Krabby Patties being unhealthy, subtly foreshadowing Squidward's fate after overindulging in them.
