If the process is to be terminated after a finite number of steps, a point generated earlier must be hit
No, thats exactly the same error I made first, too. I had assumed that only the color(s) of the piece of cake would change, but of course the whole piece (the colors) must be mirrored additionally and thats the reason why the cake can be restored after a finite number of cuts without making the last cut at position which already was cutted earlier.
I must confess that after realizing my error, I had not looked into the problem very deeply. But somewhere in the back of my mind it was nevertheless always present and after some time I had the feeling that I knew the task from somewhere. At first I thought of Martin Gardener's books, but I somehow had the feeling that it must be younger.
To cut a long story short - this brain teaser can be found in one of Peter Winkler's beautiful books, "Mathematical Mind Benders" from 2007, The book was also translated into German under the title "Mehr mathematische Rätsel für Liebhaber".
And as luck would have it, the relevant pages are currently fully included in Google's sample reading. (Chapter 9 - "Wirkliche Herausforderungen")
Have fun: https://books.google.at/books?id=e74hBAAAQBAJ&pg=PA165&hl=de&source=gbs_toc_r&cad=3#v=onepage&q&f=false