For a mermaid theme cake, you can make a rectangular sheet cake (or any shape you wish, really), and cover with blue icing on the top for water. In one corner, make a “mound” or “hill” out of cake, frost in chocolate to look like a rock, and stick an inexpensive Barbie type doll with flowing red hair into this. Draw a mermaid tail on the "rock" with green icing.
You can also make an ocean cake, with a mermaid swimming in the ocean. If planning kids birthday cakes for a Peter Pan party, include a pirate ship too!