How do I flatten laters to create a simplified image?

if you mean "Rasterize" (make simplified) go to Objects ---> Rasterize.

In addition to what the others already said, you cannot even cut a group of objects arbitrarily with the knife tool nor necessarily any combination of Pathfinder operations - they, too, operate on objects/ paths and must meet the criteria to actualyl be usable with these tools. if you already have your graphic and don't want to rebuild it "the proper way", you best option is to simply use clipping paths to hide parts to create the illusion of actual trimming...

Mylenium

Select all your elements, and then use the group command. This moves everything into the top layer and groups the selection.

Then make a new layer, and drag the colored square after the layer name to your new layer.

You are grossly misunderstanding the nature of vector artwork. There is no "flattening" of multiple paths with different Appearances and/or Attributes into a single object that resides at a single place in the overall stacking order and still retains all those different Appearances/Attributes (other than by simply rasterizing the whole thing to a single raster image).

Your file IS a stack of objects. That's true whether those objects reside on the same Layer, different Layers, inside Groups or ungrouped.

A Layer in a vector drawing program is an entirely different thing from a Layer in Photoshop.

JET