You don't say if you are filing a business return, or if you are declaring "self-employed" income on a personal tax return. So the following may or may not be relevant.
Discarding expired perishable ingredients is a required part of foodservice. You expect a small percentage (about 5%) of consumables to be discards, and they count as legitimate business expenses. No need to itemize discards--just put all those purchase slips into the "expenses" column of your accounting.
Track discards for your own benefit to avoid the loss of profit.
If somebody cancelled a cake, you had no income other than a nonrefundable deposit. If you made the cake and it cost more than the deposit, then you should be collecting a larger deposit. If you are called in for an audit, you would have to explain a habitual overspending (many cancellations) but one cancellation is again the expenditure of supplies and time that doesn't have a corresponding income.
Some people donate cancelled cakes to charitable organizations and ask for a receipt for the retail value to use as a deduction from their personal tax return.
Believe me--even a formal audit by the IRS is not going to ask where each package of fondant went. Not unless you are showing a major loss (like over $10,000) for more than one year in a row past your startup year.
Edited by BakingIrene - 1/14/13 at 11:09am