That's really cute!!!
I would be worried if the original owner did not prewash and dry the flannel. Flannel can shrink *ton*! You might want to measure a test piece of the extra fabric, wash it, measure it again, then dry it and measure again. That way you can give your giftee's mother has good information about how to wash the poncho without ruining it.
I am definitely not an expert on liquid stitch, but here goes anyway. I would sew the seam first and then use the liquid stitch to hold the edges down. Liquid stitch is usually used for quick hemming, or to secure an applique patch to fabric; not sure I would trust it for a seam. Flannel normally requires at least a 1/2-inch seam to prevent fraying; I wouldn't go any narrower than that, and I think overlapping an inch would be better.