A seller may cancel a transaction under the following circumstances:

The buyer did not pay. (The seller may flag a buyer for a payment not received, chargeback, or canceled payment.)
Both the buyer and seller agree to cancel the transaction before shipment, and the seller has issued the buyer a full refund.
The seller has decided to refuse service to the buyer, and if the buyer has already paid, the seller has issued a full refund, including shipping.
The buyer did not receive the item(s) ordered, even though the seller has provided proof of shipping, and the seller has issued a refund for the item (Shipping cost are not refunded)
The buyer and seller agreed that the buyer could return the item to the seller for a refund. The seller has received the returned item and issued a refund to the buyer for the item. (Refunding shipping is optional, unless the buyer paid with Etsy Payments, in which case you'll need to refund in full.)

All cancellations must follow these policies:

The order meets one of the above criteria.
The buyer has not yet received their item. (Received orders don’t qualify for cancellation.)
The seller refunds the buyer in full, except as described above.
The cancellation meets all of Etsy’s policies, including our Anti-Discrimination Policy.