To cancel the sale, go to the sold order and click on the receipt number - it's in the upper right hand corner of the sold item section.
You'll need to refund her money through PayPal first, then click on the blue Cancel Transaction - it will ask you some questions, you'll answer them. It'll take a couple of days for the transaction to cancel.
To refund through PayPal, go to the transaction, click on it, and there should be an option to Issue a Refund somewhere on the page.