A client recently asked me to decorate a store-bought sheet cake for her daughter's graduation. This is one of my first clients ever and I do not want to lose her business, however I do not want to decorate a store bought cake, and I am a little offended. How do I tell her nicely that I am not willing to do this?

I would tell her that you appreciate her interest but you only feel comfortable decorating cakes that you have made yourself.

I don't really understand the thinking of this client though.  Why not just ask you to make the entire thing?  Does she think this will save her money?

Yes, I think she is trying to save money. She knows my minimum charge is $100. Minimum!!!

Personally, I would love to just do the decorating!  However, if she pays X amount for the cake and then pays you to decorate it, I don't see that she would be saving any money.  Maybe you should make her aware of the fact.  She must think you would decorate it for very little money, when, in fact, that is the major cost of a custom cake.

I think you have a right to be offended. I would politely decline and I don't even think you owe her any explanation beyond that. 

Tell her that leagally you cannot work on someone else's food.  You don't know the quality of what someone else has made!  Store bought really?!  I've worked store bakeries.  No way.