If some wax fell on written text, it is forbidden on Shabbat to remove the wax to reveal the text – even just one letter – as this constitutes "writing." (If some wax covers some text of the Sefer Torah, and the wax is thick, Hacham Ovadia ruled that if the covered text is in the Parasha that is to be read that day, then the Sefer Torah is invalid; if, however, the concealed text is in a different Parasha, then the Sefer Torah may be used.)
The Rama (Rav Moshe Isserles of Cracow, 1530-1572) rules (Orah Haim 340) that if a cake has lettering on it – such as with sugar or cream – it is forbidden to cut through the lettering, as this constitutes "erasing." However, Hacham Ovadia Yosef and Hacham Bension Abba Shaul (1924-1998) ruled that for Sefaradim, this is permissible. This type of "erasure," which is not done for the purpose of writing in place of the erased text, is forbidden only Mi’de’rabbanan (by Rabbinic enactment), and it is permissible to perform an action on Shabbat that unintentionally results in an action that is normally forbidden Mi’de’rabbanan. Since the person has no intention to "erase" the lettering on the cake, and has no interest in doing so, and this "erasure" is forbidden only Mi’de’rabbanan, this is allowed. Nevertheless, Hacham Ovadia writes (in Yabia Omer) that one who is stringent in this regard is worthy of blessing ("Tabo Alav Beracha").
Rabbi Moshe Ha’levi (1961-2000), in Menuhat Ahaba (3:22; listen to audio recording for precise citation), addresses the case of bringing together letters which were written already before Shabbat in order to produce words, such as when playing Scrabble. He writes that this is entirely permissible, since the prohibition of writing on Shabbat applies to creating letters, and does not include bringing together letters that had already been produced before Shabbat. Therefore, he writes, children may be allowed to play such games on Shabbat. Rabbi Moshe Halevi notes that this applies as well to pictures; one may bring together two pieces with partial pictures on them to form a complete picture.
However, he adds, it would be forbidden to attach letters together to form words, such as games in which letters are clipped to a frame or snapped together. Although it is permissible to bring letters near one another, one may not attach the letters together. But if the letters are already in a frame, and one moves the letters around to form words (or in the case of numbers, as in the "15 Puzzle" game), then this is permissible on Shabbat.
Summary: It is permissible to slice through the lettering on a cake on Shabbat, though those who wish may be stringent in this regard. Children may be allowed to play scrabble on Shabbat, bringing letters near one another to form words, but it is forbidden to attach letter pieces together to form words.